The Container Store Group (TCS) Q4 2017 Earnings Conference Call Transcript

The Container Store Group (TCS -6.54%)
Q4 2017 Earnings Conference Call
May. 22, 2018 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Container Store fourth-quarter fiscal year 2017 earnings call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Shannon Devine. Please proceed.

Shannon Devine -- Investor Relations

Good afternoon, everyone, and thanks for joining us today for The Container Store's fourth-quarter fiscal year 2017 earnings results conference call. Speaking today are Melissa Reiff, chief executive officer; and Jodi Taylor, chief financial and administrative officer. After Melissa and Jodi have made their formal remarks, we will open the call to questions. Before we begin, I need to remind you that certain comments made during this call regarding our plans, strategies and goals and our anticipated financial performance may constitute forward-looking statements and are made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those important factors are referred to in The Container Store's press release issued today and in our annual report on Form 10-K filed with the SEC on June 1, 2017. The forward-looking statements made today are as of the date of the call and The Container Store does not undertake any obligation to update their forward-looking statements. Finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call.

A reconciliation schedule of the non-GAAP financial measures to the most directly comparable GAAP measures is also available on The Container Store's press release issued today. A copy of today's press release may be obtained by visiting the Investor Relations page of the website at www.containerstore.com. With that, I will now turn the call over to Melissa. Melissa?

Melissa Reiff -- Chief Executive Officer

Thank you, Shannon, and hi to everyone on our call today. I will go over the highlights of our fiscal Q4 and our full -ear fiscal 2017 performance. I will also discuss our strategic priorities for fiscal 2018 as we look to build on the progress we are making to improve productivity and profitability at The Container Store. Jodi will then review our financial results for Q4 and fiscal 2017 in more detail and discuss our fiscal 2018 outlook.

Specific to Q4, our consolidated sales increased 5.3%, and we had our best quarterly comp-store sales performance of the year, a comp-store sales increase of up 2.7%. This is a result of strong sales from our Custom Closets business as well as positive comp-store sales contribution from our other product categories. Q4 is the most important quarter of the year for us, as our annual Elfa sale occurs during the quarter. We were very pleased with the results of this year's Elfa sale campaign and that is despite a sizable increase in our deferred sales resulting from Custom Closet orders taken in Q4 but not yet delivered or installed.

As a result, those sales cannot be recorded and are expected to record in Q1 of fiscal 2018. We experienced strong kitchen campaign sales in Q4, which I'll discuss more in just a moment, but that did help offset some of those deferred sales in Custom Closets. We again delivered a strong quarter of web-generated sales performance, with sales up almost 21% when including our Click & Pickup sales and up 21.5% for direct-to-customer sales only. Elfa third-party sales were up 4.8% in U.S.

dollars with a 9% positive impact from foreign currency translation. These improved sales are reflective of the positive work we have been doing on our sales revitalization initiatives as well as our efficiency and optimization actions, including marketing, merchandising and organizational changes. One such example is our kitchen sale campaign that I just mentioned that occurred during the month of March for the second consecutive year. This year, we changed the strategy of the event to 25% off selected products versus last year's 15% off the entire kitchen department.

This change resulted in strong kitchen department sales during March and generated incremental gross profit dollars despite being a modest headwind to our gross margin rate. Our strong Q4 sales performance was accompanied by a 100-basis-point improvement in our consolidated gross margin with the improvement, driven primarily by our optimization plan efforts, and Jodi will discuss that more in just a minute. We demonstrated continued strong SG&A control in Q4 with consolidated SG&A leveraging slightly as expected driven by the benefits of our savings and efficiency efforts. This resulted in adjusted EPS of $0.18 for the quarter, inclusive of approximately $0.04 of incremental interest expense year over year.

For the full fiscal 2017 year, our consolidated sales were up 4.5% with The Container Store's comp-store sales up 0.9% for the year. Adjusted EPS was $0.28, flat with fiscal 2016. This adjusted EPS includes a headwind of approximately $0.11 of incremental interest expense as compared to fiscal 2016. The key to the financial progress we made in fiscal 2017 has been the smart and thoughtful execution of our optimization and strategic plans.

Regarding the direct benefit to the P&L from the optimization plan, we made progress in all areas with the SG&A savings from our May 2017 job eliminations being largely realized during fiscal 2017 and the majority of the expected savings from our cost of goods sold project and price optimization work expected to flow through in fiscal 2018. Our optimization plan aligns with our broader strategic plan that I discussed on our year-end call last year and which we have further refined based on our learnings of fiscal 2017. So now, I'd like to provide an update on our strategic priorities that we executed against in fiscal 2017. With respect to customer experience and stores, we opened all of our fiscal year 2017 new stores by the end of third quarter.

Our most recent store opening was in April in Bridgewater, New Jersey, which is our first new store opening of fiscal 2018. In addition to Bridgewater, we have a second store we plan on opening in late second quarter of fiscal 2018 in Oklahoma City. Our reduced 18,000 square foot Albuquerque store continues to deliver solid performance, validating the potential opportunity we see for future stores that are smaller in size than our historical 25,000 square foot prototype. In fact, in fiscal 2018, the Oklahoma City store as well as two relocations, our Tysons, Virginia, store and our Cherry Creek, Colorado, store, will all be under 20,000 square feet.

The much-anticipated redesign of our Dallas flagship store is expected to launch at the end of June and the store has remained open during the remodel period. This redesign features Custom Closets as a real focal point, kind of a beacon as we call it. It will also utilize lower profile fixtures for improved sightlines, enhanced lighting, updated technology and a refined arrangement of our product assortment to better assist customers in accomplishing their organizational projects. We look forward to the learnings that this remodeled store will provide us, which will impact our go-forward plans for existing store remodels as well as our decisions on our future store prototypes.

With regards to product and merchandising, we were very pleased with our fourth-quarter acceleration in our Custom Closets business, which generated a positive comp-store sales contribution of 199 -- of 190 basis points. Our new Elfa product introduced last June continued to drive comp-store sales contribution and we were very encouraged with the improvement in our other product categories, which, as I said, drove positive comp-store sales as well. We attribute the improvement in all other product category sales largely to merchandising updates as well as to our digital marketing efforts. Again, I'll discuss that more in a moment.

We are now deep into our price optimization project and undergoing price testing in a dozen stores while, at the same time, improving perception of value for the money. We are running these tests and analyzing the results to determine what elements we will implement chainwide to maximize sales and gross profit dollars. New product development continues to be a major focus and we are working hard to bring exciting new product introductions to market. Our first priority is our Custom Closets business.

In addition, we plan to continue to introduce proprietary new products throughout the store that leverage the strength of The Container Store brand. With customer acquisition and retention, we are excited about our progress here, including a new influencer program that allows us to tap into content creators who have a strong affinity with our brand and who, in turn, introduce The Container Store to their engaged audiences. We launched this program in time to leverage our kitchen sale campaign during Q4 and are pleased with the results. We also launched a new trade program that allows accredited interior designers, decorators, architects and professional organizers to apply online for exclusive benefits, including trade pricing on all products, purchase tracking and expert project support.

Our POP! program, with more than 6 million POP! Stars at the end of the fiscal year, continues to build and gain traction as we add more POP! Stars each week. We continue to deploy multiple pilots as part of our comprehensive CRM strategy that drives customer engagement and increases redemption rates for our targeted offers. We continue to spend advertising dollars more effectively as we are optimizing our paid media spend in real time based on our media mix model and we are further enhancing its capabilities. The strong online sales increases we have seen, for example, are the direct result of the work we have done and our increased spend in digital channels.

Additionally, as we have shared before, we believe that partial reallocation of our marketing spend from traditional to digital channels has been a major contributor to our improving sales in our other product categories. Pursuit of profitable growth opportunities. We continue to see opportunities for our business-to-business channels as well as maximizing profitable Elfa third-party sales. We will, of course, also continue to grow through the addition of new stores, but we'll be strategic about where we open as well as the size of our new stores.

We continue to see numerous opportunities for new stores and have been pleased and encouraged with the results from our new stores. However, we want to be prudent in our capital allocation and sure -- and ensure we are leading free cash flow available for debt repayment. As I said earlier, in addition to Bridgewater, we are opening three more new stores in fiscal 2018, two of which will be relocations of existing stores and all three will have that smaller footprint. Operational productivity and efficiency.

During fiscal 2017, we made excellent progress toward implementing the next phase of our Manhattan supply chain management system and will continue into fiscal 2018 with additional enhancements. We have begun work on our second distribution center, which is anticipated to become operational in late fiscal 2019. We will incur capex this fiscal year and next for this project, but once we have the facility in place, we expect considerable freight savings and customer service improvements as we tighten order-to-delivery time windows. With regards to technology, in fiscal 2018, we will continue with the significant undertaking we commenced during fiscal 2017 to update and enhance our in-store and online Custom Closets design tools.

Custom Closets' technology investments will continue to be important to us beyond fiscal 2018. Lastly, our most important asset, our people. Our employees are the cornerstone to our success. I'm so incredibly proud of the progress they have made throughout our business in fiscal 2017 and how we work so beautifully together as a team.

Being on the Fortune 100 Best Companies to Work For list for 19 years running was a testament to our collective efforts around our people during a time of considerable change. I thank our incredible employees very much for their support and dedication to our company and all stakeholders. We also strengthened our executive leadership team in the area of merchandising and planning. We recently hired John Gary, our EVP of merchandising and planning, reporting to me and working very closely with Sharon Tindell, our president and chief merchant, as well as our entire company leadership team.

John has amazing experience. Most recently, 11 years with ATB as merchant over all non-grocery business. We are confident that John will be a great addition to our team and that he will make a positive impact. John is responsible for all product categories outside of Custom Closets.

Sharon, along with her amazing team, will continue their laser focus on our all-important Custom Closets business. And as I announced last quarter, Gretchen Ganc joined us last December in the newly created role of EVP of strategy and analytics. And Gretchen has already made fantastic contributions in her short tenure. We enter fiscal 2018 having further refined our strategic plan.

Fundamental to this refined plan is the clarity of vision and purpose that it provides our organization. Our vision is to be a beloved brand and the first choice for customized organization solutions and services. Our purpose is to help our customers accomplish projects, maximize their space and make the most of their home. We have identified four pillars that support this vision of purpose and are executing against several initiatives through cross-functional teams.

Each initiative is led by an executive sponsor with an initiative lead and a working team to help ensure accountability. Our four pillars are, No.1, to own Custom Closets; No.2, to deliver on accomplishing projects across all customer touch points; No.3, to leverage digital and data insights to enable omnichannel growth; and No.4, to close the gap on value for the money. Let me share just a little bit more on each of the four pillars and the related prioritized strategic initiatives. Pillar one, to own custom Custom Closets.

This includes our product portfolio and go-to-market strategy, improving the customer experience, enhanced in-store and online merchandising and digital tool improvements. Within Custom Closets, we are also focused on growing our B2B channel. Pillar 2, delivering on accomplishing projects across all customer touch points. This pillar is focused solely on two areas.

Updating our marketing efforts to better communicate our brand positioning of accomplishing projects to both existing and new customers; and No.2, updating our visual merchandising to make it easier and clearer to our customers exactly how to accomplish their projects. Specific to this, in fiscal 2018, we are excited to share that we will launch a brand marketing effort that will begin in early Q2. We currently plan to invest about the same percentage of sales on marketing in fiscal '28 as we did in fiscal 2017, which is approximately 4% of sales at The Container Store's retail business, with ongoing reallocation of spend, again, from traditional to digital channels, plus this investment in brand marketing. Pillar No.4, leveraging digital and data insight to enable omnichannel growth.

We're developing digital content to support our brand position online and in-store to drive more traffic to the website and optimize for conversion. And pillar No.4, to close the gap on value for the more -- for the money. The extensive customer and customer insight work performed in fiscal 2017 showed us that we have work to do to convey the reality of our price and value proposition versus the perception of it. We must close the gap on perceived value for the money.

Throughout, the reality is we are very competitive on our pricing and carry an unparalleled assortment of high-quality products and solutions in a beautiful, visually appealing way with high affable service. We can and intend to do a much better job of communicating all of this to our customers. So during fiscal '18, we'll be working to remedy the price and value perception gap via new pricing, signage, promotion and offer strategies. This is all part of the price optimization project you've heard us discuss before.

So it definitely is a new day at The Container Store. We are evolving, growing and improving and our customer remains at the center of everything we do. Our 2018 strategic plan reflects our sharpened focus. We will continue to evolve our plan as our test-and-learn activities yield further results.

We are committed to getting better, doing better and we have the entire organization rallied around these pillars and are supporting strategic initiatives. In closing, we're really pleased to have concluded fiscal 2017 with strong fourth-quarter sales performance. We executed our sales revitalization efforts and are pleased with the positive impact on our business. Our Custom Closets strategic focus continues and is driving our results.

We expect to generate meaningful profit improvement in fiscal 2018 as we harvest the benefits from our optimization plan that we executed in fiscal 2017. We recognize, however, that we still have much work to do and look forward to fiscal 2018 as we build on our progress. So, Jodi, I'm going to turn it over to you, please, to go through the financial results and our outlook.

Jodi Taylor -- Chief Financial and Administrative Officer

Thank you, Melissa, and good afternoon, everyone.Today, I'll be reviewing our fourth-quarter and full fiscal 2017 results and then discussing our outlook for fiscal 2018. For the three months ended March 31, 2018, our consolidated net sales were $232.8 million, up 5.3% compared to the prior-year period. Sales for The Container Store retail business were up 5.3% to $214.1 million, driven by 2.7% comp-store sales increase as well as new-store sales. Custom Closets contributed significantly to our fourth-quarter comp-store sales of 2.7%, in large part due to strong annual Elfa sales, and our other product categories generated positive comp-store sales as Melissa discussed.

As a reminder, our annual Elfa sale was the same total number of days in fiscal 2017 as it was the prior year, but we had one less sale day in Q3 and one additional day in Q4. While it's difficult to precisely quantify the sales benefit to Q4 given the strong deferred sales increase, our best estimate of comp-store sales benefit to Q4 from the shift of the Elfa sale day is approximately 50 basis points. We ended the quarter and year with 90 stores and approximately 2.2 million of gross square footage, as compared to 86 stores and approximately 2.1 million of gross square footage at the end of the fourth quarter of fiscal 2016. Now, turning to Elfa International AB.

Elfa's third-party net sales were $18.7 million, up 4.8% compared to the fourth quarter of fiscal 2016, primarily due to foreign currency translation, which increased third-party sales by 9%, and partially offset by lower sales in the Nordic markets during the quarter. Moving on to profitability. In the fourth quarter, consolidated gross profit dollars increased 7.2% to $136.5 million and consolidated gross margin increased 100 basis points compared to the prior-year period. Gross margin at The Container Store retail business was up 110 basis points, driven primarily by lower cost of goods associated with our optimization plan and the benefit of favorable foreign currency contracts, partially offset by a greater portion of sales generated by merchandise sale campaign.

It's important to note that our improving comp-store sales results were not derived for incremental discounting year over year. While we did achieve our expected level of gross margin improvement for the quarter, this was largely due to two timing factors that are expected to benefit fiscal 2018. Approximately $2.8 million of anticipated gross profit dollars were not realized in Q4, with slightly more than half of that anticipated in Q1 of fiscal 2018 with the remainder anticipated in the second half of fiscal 2018. The first timing factor was an increase in deferred sales following a successful end to the annual Elfa sale.

The second factor was the expected savings from our optimization plan, flowing through slower than projected early in Q4, but getting to our targeted levels later in the quarter. We had a higher proportion of Custom Closet sales in fiscal Q4 that were not delivered and installed by the end of the quarter and, therefore, not recognized the sale. This is reflected in our Q4 fiscal 2017 deferred sales balance of $11.1 million, a $3.4 million increase over the $7.7 million balance in Q4 of last year. From a sales perspective, this dynamic was offset by a strong kitchen sale campaign in Q4, but the mix difference did impact gross margin.

And when combined with the optimization plan benefit flow-through, this results in an approximate 60 basis point gross margin headwind or approximately $0.04 EPS headwind to Q4. These timing factors that were a headwind to Q4 will be a tailwind to fiscal 2018 and are reflected in our outlook for the year that I will discuss shortly. Elfa's gross margin decreased 300 basis points from the prior-year period, primarily due to the impact of higher direct material costs. Moving on to SG&A.

As expected, we delivered slight leverage with consolidated SG&A as a percentage of sales decreasing 20 basis points to 45% in the fourth quarter of fiscal 2017, primarily due to the SG&A savings and efficiency efforts that were partially offset by incremental spending, including costs incurred for various projects. Our net interest expense in the fourth quarter of fiscal 2017 was $7.6 million, up $4.3 million in the prior-year period due to the August 2017 amendment to the senior secured term loan which increased the applicable interest rate margin. The effective tax rate for the quarter was 103.1%, compared to 35.2% in the fourth quarter of last year. The increase in the effective tax rate is primarily due to the provisional amount recorded for the one-time transition tax on foreign earnings in connection with the tax act.

On an adjusted basis, our effective tax rate for Q4 was 37.1%, compared to 35.2% in the fourth quarter of last year. Our net loss for the quarter was $400,000, or $0.01 per share, as compared to net income of $8.4 million, or $0.17 per share, in fourth quarter of last year. On an adjusted basis, excluding the one-time transition tax and costs associated with the optimization plan, our adjusted net income was $8.4 million, or $0.18 per share, as compared to $8.7 million, or $0.18 per share, in the prior -- in the previous year. As a reminder, this year's Q4 results include approximately $0.04 per share of incremental interest expense.

Now, turning to our full-fiscal-year results. Our press release issued this afternoon includes details of our fiscal 2017 full-year financial performance. Consolidated net sales increased 4.5% to $857.2 million, driven by a 4.6% increase in The Container Store retail business. Elfa third-party sales increased 3.9% to $69.9 million, primarily due to the impact of foreign currency translation, which increased third-party net sales by 4%, partially offset by lower sales in the Nordic markets.

Our comparable-store sales increase for the year was 0.9%, as compared to a comp-store sales decrease of 2.4% in fiscal 2016. Consolidated gross margin declined 10 basis points year over year to 58% of sales. Gross margin at The Container Store increased 10 basis points during fiscal 2017, primarily due to lower cost of goods sold associated with the optimization plan and the benefit of favorable foreign currency contracts. This was partially offset by a greater portion of sales generated by merchandise sale campaigns and higher costs associated with the installation services business.

Elfa gross margin decreased 180 basis points, primarily due to higher direct material costs. Consolidated SG&A as a percentage of sales increased 70 basis points to 48% in fiscal 2017, primarily due to consulting costs incurred as part of the optimization plan, which contributed 80 basis points to the increase year over year. Fiscal 2016 also included 50 basis points of benefit to SG&A for reversal of deferred compensation due to executive contract amendments that did not occur in fiscal 2017. This was partially offset by 60 basis points of SG&A leverage.

The leverage in SG&A, when excluding the optimization plan costs and reversal of deferred compensation in the prior year, was primarily due to ongoing savings and efficiency efforts, which includes savings associated with the optimization plan, partially offset by occupancy costs. New store pre-opening expenses decreased $1.6 million to $5.3 million in fiscal 2017 as we opened five new stores, including one relocation in fiscal 2017, as compared to seven openings in fiscal 2016. Net income was $19.4 million, or $0.40 per share, in fiscal 2017, compared to net income of $15 million, or $0.31 per share, last year. On an adjusted basis, excluding the impact of the tax act, cost associated with the optimization plan and cost related to the closure of an Elfa manufacturing facility, adjusted net income was $13.6 million, or $0.28 per share, as compared to $13.4 million, or $0.28 per share, in fiscal 2016.

As a reminder, incremental interest expense incurred year over year was approximately $0.11 of EPS. Turning to our balance sheet. We ended the year with $8.4 million in cash, $285.2 million in outstanding borrowings, and combined availability on revolving credit facilities and cash on hand of approximately $90.8 million. Our net debt position was down approximately $30 million from last year and we generated free cash flow defined as cash from operations less capex of $34.5 million in fiscal 2017, more than double $16.1 million in free cash flow generated the previous year.

We ended the quarter with inventory down 5.6% compared to the end of fiscal 2016 despite the increase in stores opened from 86 at the end of fiscal 2016 to 90 at the end of fiscal 2017. On a per-store basis, inventory levels at TCS were down 10.7%, with the decline largely due to improved inventory management. Now turning to our outlook. For fiscal 2018, we expect consolidated sales to be in the range of $880 million to $890 million based on a comp-store sales range of flat to up 1%.

We expect GAAP EPS to be between $0.27 and $0.37 and adjusted EPS to be between $0.35 and $0.45 on a weighted average of 49 million diluted shares outstanding. We expect TCS and consolidated operating margins to improve driven by meaningful gross margin expansion as the benefits of our 2017 optimization plan flow through the year. These benefits are expected to flow through fiscal third quarter as we began to realize them most meaningfully in Q4 of fiscal 2017. On the SG&A front, we expect to incur the final consulting cost associated with our fiscal 2017 optimization plan in Q1 estimated at $5 million, or $0.08 per share.

The optimization plan savings from job eliminations that benefited SG&A will continue to benefit the P&L through May 2018 as we began to reap those savings late in Q1 last year and throughout the rest of fiscal 2017. We expect our tax rate for the full fiscal 2018 to be approximately 30% and our annual interest expense using forward LIBOR rates, but not assuming a refinancing between now and year-end to be approximately $29 million. In fiscal '18, we expect to spend approximately $38 million in capital expenditures for our planned two store openings and two relocations, a second distribution center expected to open in late fiscal 2019, technology projects, maintenance spend on our existing stores, and our Elfa business. With regards to a second distribution center, after an updated extensive network study, we've determined that we should move forward with the opening of a second DC, which will be located in the Northeast.

We've operated for almost 40 years out of a single facility in Dallas and anticipate considerable freight savings, a payback on our new DC investment of under three years and customer service improvements for our direct ship customers once this facility is up and running. We anticipate using approximately $11 million to $12 million of capex spending for this facility during fiscal 2018 and fiscal 2019, respectively, as we complete the project and bring the new facility online in late fiscal 2019. We plan to generate positive free cash flow again in fiscal 2018, which we expect to utilize for further debt reduction. And specific to first quarter of fiscal 2018, we expect to record that $5 million, or $0.08 per share, of the last of our planned consulting expenses related to the optimization plan.

These expenses will record to SG&A, but will not be included when calculating adjusted EPS. While we do expect the timing headwinds of Q4 to partially benefit Q1, we expect that to be partially offset by SG&A which excluding consulting expenses is expected to be flat to delever slightly in Q1 this year when comparing to Q1 last year. And since we did not include a refinancing of our debt until August of 2017, we expect to continue to incur incremental interest expense in Q1 of approximately $3.2 million, or approximately $0.05 per share. And in Q2, we expect to incur approximately $1.4 million, or approximately $0.02 per share, of incremental interest expense with the remainder of the year relatively comparable to last year.

There are also two call outs to mention specific to second quarter fiscal 2018. As a reminder, in Q2 of fiscal 2017, we incurred approximately $6.7 million of consulting expenses that recorded to SG&A and we do not expect such expenses to be incurred in fiscal 2018. However, in the second quarter of fiscal 2018, we do expect incremental marketing spend of 60 to 70 basis points due to the launch of our brand's marketing. For full fiscal 2018, however, our annual marketing expenses at TCS are expected to be approximately the same as last year as a percentage of sales.

We currently expect to spend slightly less on marketing as a percentage of sales in the other quarters of fiscal 2018. In closing, we're very pleased to finish the year with much improved Q4 sales as all of the progress we're making on our key strategic initiatives positively impacted the business. We look forward to building on this progress in fiscal 2018, while realizing profitability improvements as we harvest the benefits of our 2017 optimization plan. We look forward to updating you on our first-quarter call.

Thank you. So now I'd like to turn the call back over to the operator so we can open the lines up for your questions. Devon?

Questions and Answers:

Operator

[Operator instructions] Our first question is from the line of Steve Forbes with Guggenheim Securities. Please proceed with your question.

Steven Forbes -- Guggenheim Securities -- Analyst

Good afternoon.

Melissa Reiff -- Chief Executive Officer

Hi, Steve.

Steven Forbes -- Guggenheim Securities -- Analyst

So, you mentioned the price perception. And I think you said study, but maybe correct me if I'm wrong there. So -- but -- how broad was that, right? So if you think about the difference between what the perception was and what you believe reality is, is it broad throughout the categories? Or is it specifically non-closet categories? Really any color on how you think about the results of those -- of that perception study.

Melissa Reiff -- Chief Executive Officer

Yes. I mean, Steve, we did that really deep consumer and customer insight work and we really were not surprised that we do have, and we recognized a price perception issue that we feel we can overcome. I think because we -- our store is very clean. Our stores look good.

There's high service. People think, gosh, is the pricing inflated in any way? And actually, it is not. And we have tried for the last 40 years to really work on that, but we're going to be more aggressive now and we're really addressing it in kind of a multi-pronged approach, if you will, that's really going to include visual merchandising changes and signage. We're going to be incorporating new price -- new opening price points on products where we think that we have higher quality.

We're going to be doing some bundling of products at a special value. So it's going to be across all customer touch points and it's not going to happen overnight. This isn't something that you can just do a campaign and change it, but we want to communicate to existing and new customers that we have very competitive sharp pricing in addition to offering everything they need to help them accomplish their projects.

Steven Forbes -- Guggenheim Securities -- Analyst

Because I guess as it relates to the brand marketing campaign, right, in the second quarter, is it -- are you also thinking about how you communicate with your customers, meaning more educational type of communication versus restricted promotional? Or how is that going to change the email distribution? Or if you think about kind of the annual events you do throughout the year, is it going to tie -- is the campaign going to tie into all that? I mean should we expect changes in the cadence of the annual events or type of annual events?

Melissa Reiff -- Chief Executive Officer

I mean, we're always looking at our merchandising campaigns and the cadence of our events and making appropriate changes as we did with this year's kitchen sale, but this branding campaign, Steve, is something that we've been wanting to do for years and I don't think I have ever been more excited about something. It is a campaign that is a longer-term commitment that we're investing in and we are definitely, just as you said, but going to be communicating to existing and new customers what our vision is, what our purpose is, how we are going to help them accomplish the projects. And it's going to be a relevant message for all customers across all touch points emphasizing all of our differentiators. Now again, like with any branding campaign, you don't stop and start it, you continue on, and we don't know what the impact immediately is going to be, but we are, obviously, wanting to improve awareness, consideration and ultimately acquire new customers.

So we're going to be monitoring this through customer acquisition via all of our POP! Star database. So we're excited about it, and I hope it's really well received, obviously.

Steven Forbes -- Guggenheim Securities -- Analyst

And then a quick follow-up here regarding the fourth-quarter comps. So you mentioned the 50 basis points due to the dayshift. But if we just think about the Custom Closets impact holistically for the quarter, can you quantify -- as for that I know you mentioned non-closet was positive, but what was the Custom Closets impact?

Melissa Reiff -- Chief Executive Officer

Yes. I mean our Elfa Sale was quite successful and yes, that one day we think was about, as Jodi said, about 50 bps.

Jodi Taylor -- Chief Financial and Administrative Officer

Custom Closets, Steve, is an overall comp contribution, it was 190 basis points.

Melissa Reiff -- Chief Executive Officer

Yes. And then the other product category, Steve, we're about 80 bps.

Steven Forbes -- Guggenheim Securities -- Analyst

Perfect. Thank you very much.

Melissa Reiff -- Chief Executive Officer

Thanks.

Jodi Taylor -- Chief Financial and Administrative Officer

Thank you.

Operator

Our next question is with Matt McClintock with Barclays. Please proceed with your question.

Matt McClintock -- Barclays -- Analyst

Hi. yes. Good afternoon, everyone.

Jodi Taylor -- Chief Financial and Administrative Officer

Hello, Matt.

Matt McClintock -- Barclays -- Analyst

I was wondering if we could focus on the DC that you plan on opening. Can you help us think about how that DC will ramp in terms of efficiency over the coming years after that or in terms of optimization? And then secondly just on a reduced store expansion plan this year relative to prior years, how we should think about the DC's impact on your business over time? Should you not continue -- should you not decide to ramp up store expansion from where we're at today? Thanks.

Jodi Taylor -- Chief Financial and Administrative Officer

Hi, Matt. Sure. I'll take that. The way we're thinking about this DC is we have run -- and updated and run numerous logistic study, and in each case, it's pointed to a need to do one in the Northeast.

And we've really kind of put that off as long as we feel like it's prudent to do so because we're at a point, as you heard me mention in my remarks, where we expect to see considerable freight savings and a payback of under three years on a distribution center. And it will also have a significant improvement on our service levels because for over 40 years we've serviced every customer in every store, and we're, of course, border to border here in the U.S. out of the single distribution center in Dallas. So the plan is the capital is split relatively evenly between '18 and '19 at $11 million to $12 million each.

For fiscal '18, it's primarily a capital discussion. We don't expect expenses incurred to be of any relevance to this fiscal year. However, in fiscal '19, the facility is expected to come online later in fiscal '19. And so the full operational impact of savings from those freight savings that we -- that is quite meaningful will not actually be felt until we get to fiscal 2020.

So for fiscal '19, we do expect that we'll incur some -- in addition to the capital I mentioned, we'll incur some expenses associated with occupancy, training of employees, receiving of inventory, those types of things in advance of the facility opening. We don't expect that to be hundreds of basis points. We expect it to be something that's more like tens of basis points and we will obviously work very hard to try to offset that through any other efficiencies in our business that we can glean. But we think this is something that we thought hard and long about.

We have a very, very good execution plan. We have a track record in taking on large projects, for example, automation in our distribution center, a whole new supply chain system in our company, all of which came in on time and on budget. And we already have a new leader chosen, who's an existing leader in our distribution operations to make sure from a cultural and company perspective that that's a real smooth transition. So we're thinking through it real carefully and feel really good about our plan.

Matt McClintock -- Barclays -- Analyst

Thanks for the color. And then as a second question, just you talked about launching on further into proprietary new products throughout the store. And at the same time, you're talking about sharper pricing throughout the store. And I just want to kind of understand the combination of both of those.

Should we expect a lot of the newness to come in at a lower price point, a sharper price point than in the past? Is that where some of this pricing optimization will flow through? Or is that more of the existing product mix, that you have probably better data to drill down on where the pricing should be? Thanks.

Jodi Taylor -- Chief Financial and Administrative Officer

Matt, I'll start it and I know Melissa is going to want to add in. But we definitely look at this very, very granularly in terms of literally by SKU and spans the globe in terms of options for our products. The overarching goal of this price optimization project is really simple. It's to increase sales and to increase gross profit dollars.

Along the way like with any company who does these projects, there's going to be some ups and some downs in the process and, as Melissa talked about, changes to messaging, changes to visual presentation, changes to perhaps introducing an opening price point to make sure that the value creation is there, in some cases, changing the package quantity for a customer so that it's much more convenient, and therefore, not value perception. It's a wide-ranging product process that we're in testing of right now.

Melissa Reiff -- Chief Executive Officer

Exactly. We're in the testing phase and we expect, Matt, to have some statistical significance probably by the end of Q1 of fiscal '18. And as we continue to develop our private label brand because we know from our work, from our consumer work that the TCS brand, The Container Store brand, customers really, really respond to and resonate, obviously, we'll be looking at that sharp pricing on that as well.

Matt McClintock -- Barclays -- Analyst

Perfect. Thank you very much.

Melissa Reiff -- Chief Executive Officer

Thanks, Matt.

Jodi Taylor -- Chief Financial and Administrative Officer

Thanks.

Operator

Our next question is with Matt Fassler with Goldman Sachs. Please proceed with your question

Matt Fassler -- Goldman Sachs -- Analyst

Thanks so much and good afternoon.

Melissa Reiff -- Chief Executive Officer

Hello.

Matt Fassler -- Goldman Sachs -- Analyst

Hi. My questions are mostly of a financial nature and I want to get clarification on a couple of different factors. First of all, to the extent that the closets business contributed 1.9 percentage point to the comp, what kind of comp does that imply for that business? And what does the trajectory of that look like, kind of the 1.9 percentage point contribution is the biggest one from closets you had in a number of quarters?

Jodi Taylor -- Chief Financial and Administrative Officer

Matt, you heard us mention that we estimate the additional Elfa Sale day benefited us by about 50 basis points. So that's a small portion of that strengthening. It's such a focus area for us that -- and, of course, remember that the Elfa Sale is our strongest time to sell Elfa. So that's going to drive inherently more sales in that period of Custom Closets, but that was still a strong performance even in comparison to other Q4s from a Custom Closets perspective.

So we like to believe that our efforts around everything we're doing here --

Melissa Reiff -- Chief Executive Officer

Everything we're doing, yes.

Jodi Taylor -- Chief Financial and Administrative Officer

To drive Custom Closets.

Melissa Reiff -- Chief Executive Officer

We're getting some results, yes, yes.

Jodi Taylor -- Chief Financial and Administrative Officer

Exactly. Not just one thing.

Matt Fassler -- Goldman Sachs -- Analyst

OK. And then, I don't know if you commented on transaction count versus ticket, broadly speaking, and I'm curious about that, both overall and then within the Custom Closets business.

Melissa Reiff -- Chief Executive Officer

Well, as you know we saw comp improvement. We saw it come for both traffic and tickets. And again, everything we do, all our initiatives are all intended to drive, to improve the trend. We don't -- we never break down traffic and ticket, but it did come from both, Matt.

Matt Fassler -- Goldman Sachs -- Analyst

OK. And then finally, if you could just again refresh us on where you stand from a total dollar accrual number in the profit optimization plan kind of what the endgame is and how far along we are? I know you talked about some of that getting pushed out into the new fiscal year, any precision you can give us about how much is left in that would be great.

Melissa Reiff -- Chief Executive Officer

Yes. Sure. Absolutely. We expected to get annualized benefits about $20 million from the optimization plan and we've realized about $12 million of those in fiscal '17.

So on the cost side, cost of goods side, there were minimal benefits that we realized in '17. On the SG&A, so most of those are expected to be realized in '18 in Q1 through Q3. On the SG&A side, most of those were largely realized in fiscal '17. So we're not expecting those to benefit us except for the first 1.5 months of Q1.

We do expect to realize that residual, like I said, largely through gross profit in Q1 through Q3. And we also expect other benefits from projects that we're working on that we think will positively impact gross profits, specifically in the second half of the year. So just to be real clear, all of our assumed operating margin expansion in fiscal '18 is expected to stem from gross profit improvement without the improvement coming from SG&A, but rather through gross profits.

Matt Fassler -- Goldman Sachs -- Analyst

Thank you so much for that. Appreciate it.

Melissa Reiff -- Chief Executive Officer

Sure.

Operator

Our our next question is with Dan Binder from Jefferies. Please proceed with your question

Dan Binder -- Jefferies -- Analyst

Thank you. It's Dan Binder. So just kind of back to the envelope math, the growth in deferred sales that you've mentioned, was that a little over 1 point to comps if you would have tried and factor that growth in? And the second part of my question was related to the sale itself. I mean, it seems like you generate a lot of volume around that sale.

I'm just kind of curious now that you passed it, what has happened to comp trends?

Jodi Taylor -- Chief Financial and Administrative Officer

I'll start that one. The deferred sales -- your math is good, yes, the deferred sale number that we referred to is just over one point of comps. So that's correct. And then the sale itself, or just in terms of our trend so far in Q1, we don't get specific in outlook.

Melissa Reiff -- Chief Executive Officer

But we're -- yes, we're quite pleased with the way Q1 has started off knowing that, of course, we have a lot of the year left.

Jodi Taylor -- Chief Financial and Administrative Officer

And still half of the quarter.

Melissa Reiff -- Chief Executive Officer

Yes.

Dan Binder -- Jefferies -- Analyst

OK. And then on the gross margin, I don't know if I missed it, but can you give us what the benefit was from FX? And it sounds like you're expecting big progress there. Do you have just the general goal for gross margin for next year, all-in?

Jodi Taylor -- Chief Financial and Administrative Officer

I can answer the first one. Our benefit to FX in Q4 was -- actually, it was the same for both Q4 and for fiscal '17. It was approximately 30 basis points. So that benefit that we saw in the year because of a stronger dollar was that as I mentioned.

In terms of gross margin, again, I mentioned that we expect all of our operating profit improvement to come through gross profit, not through SG&A leverage. We had previously talked about the fact that we are doing some strategic hires. We're doing some investment in our strategic priorities and we're investing tax savings in those items. So that puts a little bit of pressure on the SG&A line.

However, the optimization plan, we do, I think is going to have a meaningful impact to gross margin. You can see what happened in Q4 and we think that can absolutely continue and accelerate.

Dan Binder -- Jefferies -- Analyst

OK. Thank you.

Operator

Ladies and gentlemen, we have reached the end of our question-and-answer session. And I would like to turn the call back over to Melissa Reiff for closing remarks.

Melissa Reiff -- Chief Executive Officer

Yes. thank you. I just want to, again, thank everybody, for joining the call. Jodi and I will look forward to talking with you at end of Q1.

Jodi Taylor -- Chief Financial and Administrative Officer

Thank you.

Operator

[Operator signoff]

Duration: 48 minutes

Call Participants:

Shannon Devine -- Investor Relations

Melissa Reiff -- Chief Executive Officer

Jodi Taylor -- Chief Financial and Administrative Officer

Steven Forbes -- Guggenheim Securities -- Analyst

Matt McClintock -- Barclays -- Analyst

Matt Fassler -- Goldman Sachs -- Analyst

Dan Binder -- Jefferies -- Analyst

More TCS analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.