The Container Store Group, Inc. (TCS -0.56%)
Q4 2020 Earnings Call
May 12, 2020, 6:30 p.m. ET
- Prepared Remarks
- Questions and Answers
- Call Participants
Caitlin Churchill -- Investor Relations, ICR Inc.
Thank you for listening to The Container Store's Fourth Quarter Fiscal Year 2019 Preliminary Financial Results and Business Update Call. Melissa Reiff, Chairwoman and Chief Executive Officer; and Jodi Taylor, Chief Financial and Administrative Officer, will provide further commentary on the company's fourth quarter and full year results and will also provide an update on quarter-to-date trends in the business, which we announced with our press release, dated May 12, 2020. A copy of the press release may be obtained by visiting the Investor Relations page of the website at www.containerstore.com.
I need to remind you that certain comments made during these remarks regarding our plans, strategies, expectations regarding liquidity and goals, our anticipated financial performance, our plans in response to COVID-19 and reopening our stores and potential impact of COVID-19 on our business 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 May 30, 2019. The forward-looking statements made on this recording are as of May 12, 2020, and The Container Store does not undertake any obligation to update its forward-looking statements.
We will also refer today to Elfa's third-party net sales performance, excluding the impact of foreign exchange and net debt, which are non-GAAP financial measures. For more information, please refer to our May 12 press release at www.containerstore.com.
Finally, on today's call, we will discuss certain preliminary financial results for the fourth quarter of fiscal 2019. These results are estimates only and are subject to the completion of our financial close processes and the preparation and audit of our financial statements. We will also make certain statements regarding our financial performance for the month of fiscal April 2020 and the first quarter 2020 to-date. These statements are not necessarily indicative of the financial performance that may be expected to occur for the first quarter of fiscal 2020 and or any future fiscal period. For more information, please see the financial disclosure advisory included in our press release.
I will now turn the remarks over to Melissa. Melissa?
Melissa Reiff -- Chairwoman, Chief Executive Officer & President
Thank you, Caitlin, and thanks to those of you who are listening to our call today. Before I begin, I want to say that our thoughts continue to be with those who are suffering from the coronavirus pandemic and to those who are fighting the outbreak on the frontlines, from first responders to healthcare workers and all those in our essential services. Our gratitude is endless.
At The Container Store, we've made many difficult decisions as we navigate through these very challenging times. Our number one goal has been and will continue to be that of protecting our employees and customers, as well as preserving our long-term ability to offer jobs and benefits to our employees and products and services to our customers.
As of April 6th, we temporarily closed all of our stores, with approximately 54 stores at that time shifting to Click & Pickup, contactless curbside delivery and scheduled in-store appointments, if permitted, where we allowed only limited customers in the store at a time, and of course, we are observing all health and safety protocols. The stores offering these services are doing so only if it is legally permitted and where employees wish to work, with the number of stores currently operating in this fashion now standing at 79.
Due to these temporary store closures and limited operations, we had to make the incredibly difficult decision to furlough the majority of our store teams. Also during this pandemic, we require a smaller workforce to execute the critical activities of the business, and therefore, we furloughed a portion of our corporate employees as well, and reduced the base salaries of our company leadership team by up to 45%, beginning with me. Base salary reductions were also applied to other salaried employees. Additionally, any earned fiscal 2019 bonus payments are indefinitely deferred, and the non-employee members of our Board of Directors agreed to waive their April 1, 2020 quarterly retainer.
To understand the impact COVID-19 is having on our business, I want to provide a high-level view of our fiscal 2019 fourth quarter performance, which began to be impacted by the pandemic, starting with our first temporary store closure on March 14. Q4 to date, through February, our business was ahead of our internal plan, that incorporated the difficult comp store sales comparison to last year, when our Q4 comp store sales were up 8.5%. Please recall that our business benefited greatly in Q4 last year due to the Netflix show Tidying Up with Marie Kondo that was released in January 2019. This show and subsequent heightened interest in storage and organization solutions, helped to drive that 8.5% comp in Q4 last year and was the reason that we planned Q4 comp store sales this year to be down in the low single-digit range. Our comp store sales continue to perform in line with our plans through the first two weeks of March, until on March 14th stay-at-home orders implemented by state and local governments, in their efforts to increase social distancing and stop the spread of the coronavirus began to impact us, and resulted in what would become the first of our temporary store closures.
During the last three weeks in March of our Q4, with many of our stores closed and those that remained open, operating with reduced hours, we did see a very strong increase in our e-commerce business, and since the beginning of fiscal 2020, which began on March 29, online customer orders have nearly quadrupled the level of the prior year and like many retailers, with significant online growth trends, we are working diligently in our distribution centers to fulfill these orders as rapidly as possible.
With customers spending more time in their homes, there has been increased interest in storage and organization solutions and accomplishing many home projects, carving out spaces for a work-from-home office, remote online learning for children, closet, pantry and garage organization to name just a few examples. This has resulted, as I said, in an increase in online demand for our products, solutions and services. In fact, during this time, we've also continued to see strong enrollment in our POP! loyalty program. We ended the fiscal year with more than 8.6 million enrolled, and this number continued to grow in fiscal April by approximately 20,000 enrollments per week via our website. For reference, we enrolled approximately 24,000 POP! stars a week on average in fiscal 2019, when both our retail stores and online store were fully operational. We are delighted that we are seeing such strong enrollments only through our website, attracting new customers to our sites and introducing them to our brand. While we cannot completely offset the negative impact from our stores being temporarily closed, I am proud of our team for the commitment and dedication to our customers during this time.
For fiscal 2020 Q1 to-date, when you look at retail sales orders taken at The Container Store, we have been able to preserve approximately 76% of our retail sales generated during the same timeframe last year through our website, both online direct ship to customers and Click & Pickup contactless curbside delivery, as well as our phone and business-to-business sales. Jodi will discuss this in more detail in a moment, but it's also important to note that we have seen a surge in online orders that we have yet to ship to our customers that are part of these sales orders taken. While we are very encouraged by this, we are also cognizant of the fact that Q1 is usually the lowest volume period of the year for us, and we have also yet to cycle strong Custom Closets sales periods from last year. As you may recall, our well-trained store employees are key in executing our selling strategy for Custom Closets.
We are, of course, adapting our campaigns for our new reality and this year, we will be shifting the timing and content of some of our campaigns as compared to last year. For example, our Kitchen Sale extends through the end of May this year, over a month beyond when it ended last year and our Closet Essentials Sale this year begins next week, about a month later than last year. Also, rather than running an Elfa free installation campaign during a period when many customers prefer not to have anyone in their home and prefer do-it-yourself, we pivoted to a 30% off Elfa promotion. We realized that we must be as flexible and fluid as ever during these times, and we will remain nimble, decisive and responsive to the needs of our customers and the environment in which we all live.
I am particularly proud of the way our company and our teams have been so quick to adapt to the challenges and decisions that this time requires, and swiftly adjusting plans and go-to-market approaches to maximize sales in a virtually closed store environment, along with protecting our financial health and liquidity. As I already mentioned, we have made incredibly difficult decisions on the cost front and non-critical capital projects that have not already been committed to are being paused or canceled, as we focus on navigating current conditions by simultaneously planning for a full reopening of our stores in the very near future.
As we look beyond this pandemic, we believe there are great opportunities ahead for our brands. We are finalizing our reentry approach for our stores, our employees and our customers. Given what we think will be the increased time spent at home, we are and will continue to quickly adapt our marketing campaigns, our merchandising approach, our online interface and tools as well as our delivery options to best meet our customers' needs.
Many of these learnings may have far-reaching implications for The Container Store's new normal. For example, the potential to leverage technology and virtual consultations for Custom Closets solutions and the ability to drive higher online penetration for our business than we have historically seen. In April, we launched a new virtual in-home design service for Custom Closets, using Zoom technology and thus far, we are very happy with the customer response. I'm also very pleased that we invested in our online closet design tools during fiscal 2019, as the timing turned out to be fortuitous, and we are leveraging that investment well during these times, when customers are shopping on our website from home.
As I shared previously, we believe that we have tremendous growth opportunities ahead for our brand. We are designing a relevant go-to-market strategy that delivers what the demands of our new normal will be and prioritizing our initiatives to capitalize on the opportunities with the highest potential. We will continue to do all of this, while keeping our employees and customers top of mind, safe and well, as well as the financial health and liquidity of our company. We will be ready to fully reopen our stores and execute our operations, as soon as it is allowed and safe to do so.
While we are not providing any type of outlook at this time, Jodi will elaborate more on our early results in fiscal 2020. Please note that I believe that we have taken the right, albeit difficult, steps to navigate this uncharted time, and we will continue to do so. I believe passionately that we will emerge a stronger and a better company.
So I will now turn the call over to Jodi.
Jodi Taylor -- Chief Financial Officer and Administrative Officer
Thank you, Melissa, and good afternoon, everyone. I also want to express my thanks to all those working on the front lines during this pandemic, and my heart goes out to those impacted by the coronavirus. As you saw in our release this afternoon, we have provided our preliminary unaudited fourth quarter and full fiscal year 2019 sales and financial results. Given the timing and the impact of the COVID-19 pandemic on our business and annual close, we are still finalizing certain judgmental areas of our financial statements that rely on future projections, specifically including impairment of various non-current assets and their related income tax impacts. As a result, we expect to file our Form 10-K in the coming weeks and may rely on the SEC's extended filing deadline for companies that are unable to meet the filing deadline due to circumstances related to COVID-19.
As Melissa reviewed, our fourth quarter sales performance was tracking ahead of our expectations until we began to experience the negative impact from COVID-19 and swiftly undertook the important and necessary measures to ensure the health and safety of our employees, customers and communities as well as our own financial health.
For the two month fiscal period of January and February, we delivered a preliminary consolidated net sales decline of 0.6% versus last year and The Container Store retail business had a comp store sales decline in the same amount. As a reminder, a store is excluded from our comp store sales calculation for any month that it's closed for more than seven days. For the fiscal month of March, preliminary consolidated net sales declined 11.7% compared to the same period last year, as we temporarily closed 51 stores during fiscal March, based on the guidance from government officials and health authorities as well as other location-based factors.
Preliminary comp store sales were down 9.9% during the month of March, as specifically in the last three weeks of the five week month, we had 19 of our comp store sales that were closed for more than seven days, and therefore, excluded them from our comp store sales calculation for the month of March. This took our Q4 comp store sales from the down 60 basis points we realized quarter-to-date in Q4, through fiscal February to instead being down 3.6% for Q4 and brought the full year fiscal 2019 comp store sales down to an increase of 2.9% from an increase of 4.1% that we had realized February fiscal year-to-date. We have 51 stores closed more than one day during the month of March and if these stores were to all be excluded from our Q4 comp store sales calculation, our Q4 comp store sales would have only been down 1.7%, and the full fiscal year 2019 comp store sales would have been up 3.6%, much closer to where we were tracking to come in for the quarter and full year prior to the COVID-19 impact.
As it relates to Elfa's third-party net sales performance, excluding the impact of foreign exchange, we delivered an increase of 4.6% during fourth quarter fiscal 2019. Elfa is based in Sweden and has experienced a more delayed disruption from COVID-19 than we've seen in the U.S. But starting in April of fiscal 2020, they have seen more third-party sales pressure and expect that to continue for a period of time in fiscal 2020. From a profitability standpoint, our estimated consolidated gross margin for Q4 was 59%, up 40 basis points from the 58.6% in last year's Q4.
By segment, gross margin at The Container Store is estimated to be down 10 basis points, driven primarily by a combination of successful merchandise and marketing campaigns, resulting in a higher mix of lower-margin products and services, as well as the negative impact of foreign currency. Office gross margin is estimated to increase by 570 basis points, primarily due to lower direct material costs and production efficiencies.
Consolidated SG&A dollars are expected to decline by 3.6% to $106.1 million compared to $110 million in Q4 of last year. As a percentage of sales, SG&A is expected to be leveraged by 50 basis points, driven primarily by the deleverage of occupancy, payroll, marketing and other costs as a result of the COVID-19-related lower sales impact, partially offset by lower credit card fees due to a bank card settlement received.
With regards to our balance sheet, as you saw in our release issued March 30, we made the decision to proactively drawdown $50 million under our revolving credit facility in an abundance of caution given the dramatic shift we saw in the environment with the impact of COVID-19. As a result of the drawdown, as of the end of fiscal 2019, we had a balance of $78 million outstanding under our revolving credit facility and total ending debt net of deferred financing cost of $333.5 million. We ended the fiscal year with $67.8 million in cash on hand, which, when combined with our revolver availability, resulted in total liquidity at fiscal year-end of $96.4 million.
Our term loan has a current leverage covenant of net debt to adjusted EBITDA of 4.5 or less than we were and remain below the required threshold ending fiscal 2019 with preliminary net debt to adjusted EBITDA of 2.9. Net debt is defined as total debt less total cash and adjusted EBITDA includes certain adjustments we outlined in our SEC filings. Our revolving line of credit has a spring and fixed charge covenant of 1.1 cash flow to debt service charges that only applies if excess availability falls below $10 million. Year-end excess availability on our revolver is $15 million and current excess availability remains approximately the same.
In addition to protecting our balance sheet, on March 30, we announced significant cost reduction measures we have taken to ensure we are operating with the most efficient cost structure given the current operating environment. As Melissa outlined, this includes a number of payroll-related actions, such as employee furloughs, layoffs, temporary base pay cuts, bonus payout deferrals and suspending the company's 401(k) match. Beyond this, we are very much executing broad austerity measures in all spending throughout our business.
For example, marketing spend is primarily digital-focused with spend reductions made, and business travel has been completely put on hold. Where we are continuing to invest is primarily in our two distribution centers, our online business and digital marketing. These collective efforts are expected to cut millions of dollars of expenses from our cost structure in fiscal 2020, better aligning our expenses with expected lower sales during the year as a result of COVID-19 impact. Historically, our expense structure at The Container Store has been relatively evenly split between fixed and variable expenses.
We've also reviewed all capital spending projects and have delayed the noncritical ones, including the plans for store openings for fiscal 2020. We currently expect to open one store in late fiscal 2020 in Richmond, Virginia, pending developments related to COVID-19. Otherwise, our capital spending for fiscal 2020 is expected to be mainly dedicated to maintenance capital and necessary technology investments.
We currently expect our total capex for fiscal 2020 to be in the range of $12 million to $15 million. Our fiscal 2020 plan includes the objective to generate free cash flow and to also generate cash from working capital, predicated on an assumption that brick-and-mortar stores gradually open up but continue to see sales declines, but the online channel continues to grow well above last year. We ended fiscal 2019 with inventory levels of approximately $124 million, up 14% over last year, but we're now selling through in early fiscal 2020, fortunately, without fashion or markdown risk. This allows us the opportunity to generate cash from the sell-through of existing inventory in the short term.
Given the strength of our online business, combined with these actions to reduce our costs and cash outlays, we believe we are positioned to weather this COVID-19 crisis. Our actions have been designed to maximize our liquidity, assuming the worst, but also preparing for a new normal that we can fully capitalize on. While we are not providing guidance at this time, we did want to provide you with an update on our operations quarter-to-date, about six weeks into the first quarter of fiscal 2020.
For the month of fiscal April, our GAAP comp store sales were down approximately 45%. However, this does not include approximately $11 million of online orders taken at the end of fiscal April but not yet shipped and delivered to our customers. We've seen a dramatic surge in online customer orders while stores have been closed to the public, with online order intake nearly quadruple the level with the prior year since the start of fiscal year 2020 on March 29.
Major efforts have been undertaken to increase the shipping volumes from the distribution centers, resulting in significantly higher levels of online order shipments over the prior year since the start of fiscal year 2020. We opened our second distribution center in Aberdeen, Maryland in fiscal 2019, which is helping increase our output, and we are hiring employees in our distribution centers. Of course, this is all being done with the highest levels of concern for the safety and well-being of our employees, which does have an impact on productivity that we are working hard to offset by increasing hiring and utilization of our stores to divert online orders to Click & Pickup orders where possible.
When you look at our retail sales based on orders taken, which takes into consideration customer orders taken and not yet delivered to a customer and is more reflective of customer demand trends, Q1 to date, we are maintaining approximately 76% of the total retail sales generated for the same time last year. However, it's important to note that these online orders need to be shipped and delivered to our customers in order for us to collect cash and record them into our Q1 fiscal 2020 GAAP sales results. Strong efforts are under way to ship and deliver online orders to our customers.
As Melissa mentioned, as of today, we have 79 stores open with contactless Click & Pickup curbside delivery and in certain cases, also with in-store appointments for limited customers. We are continuing to use all recommended health and safety standards, including utilization of masks, gloves, taking of employee temperatures prior to beginning work and asking our customers to also wear masks when in our stores.
From a liquidity perspective, our actions we have outlined have allowed us to maintain cash balances at The Container Store that are relatively comparable to the levels we had at the end of fiscal March, with fiscal April cash balances ending at approximately $62 million. As previously mentioned, our cash balances at the end of fiscal April do not include approximately $11 million of unshipped online orders since we do not charge for the order until we ship the product. Based on what we see today, we currently believe that we have adequate liquidity as we look out over the next year.
This concludes our prepared remarks. As mentioned, we expect to file our Form 10-K in the coming weeks and may rely on the SEC's extended filing deadline for companies that are unable to meet the filing deadline due to circumstances related to COVID-19. We hope that everyone continues to stay safe, and we look forward to having you back in our stores in the very near future.
Questions and Answers:
Duration: 24 minutes
Caitlin Churchill -- Investor Relations, ICR Inc.
Melissa Reiff -- Chairwoman, Chief Executive Officer & President
Jodi Taylor -- Chief Financial Officer and Administrative Officer