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Container Store Can't Get a Holiday Bump

By Dan Caplinger - Feb 6, 2018 at 7:54PM

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Find out what disappointed investors about the organizational retailer's results.

Specialty retail is a tricky business, as companies have to make sure that they stay in touch with the collective consumer consciousness while remaining true to their niches. For Container Store Group (TCS 5.62%), 2017 was an up-and-down year, and investors had to deal with some setbacks even as they remained hopeful about the opportunities that the organizational goods specialist had to regain its past glory.

Coming into Tuesday's fiscal third-quarter financial report, Container Store investors were hoping to see modest but still noteworthy gains for the top and bottom lines. Results weren't quite as good as many had hoped, and continued weakness during the key holiday period spurred disappointment among those wanting to see growth that was more reminiscent of how the company performed earlier in its history. Let's take a closer look at Container Store and what its latest results mean for its future.

Closet showing nooks for shoes, shirts, dresses, and accessories in an organized format.

Image source: Container Store.

Container Store keeps trying to move forward

Container Store's fiscal third-quarter results showed some of the struggles that the retailer has had to deal with over time. Revenue was up 3.1% to $223 million, but that was slower than the 5% growth that most of those following the stock had wanted to see. Similarly, adjusted net income fell 3% to $5.08 million, and that resulted in flat adjusted earnings of $0.11 per share, falling short of the consensus forecast among investors for $0.13 per share.

Compared to the previous quarter, many of Container Store's key metrics were disappointing and failed to build on past momentum. The retail business produced sales growth of just 2.4%, as most of the heavy lifting came from the Elfa international segment. Elfa's 10% boost, however, came primarily from the weaker U.S. dollar against European currencies. Meanwhile, comparable-store sales were down 0.2%, with particular weakness in the stores' holiday departments, which contributed about a 1% dip.

Container Store did get a nice lift from new tax reform laws. The company reported a boost of $0.50 per share to its earnings, largely as a result of the revaluation of deferred tax liabilities.

CEO Melissa Reiff tried to take an incremental view of how Container Store is picking up ground. "We made further progress with our core Custom Closets offering and delivered continued improvement in all of our non-closet categories," Reiff said, "with the exception of our holiday departments, which typically represent a small percentage of our annual sales." She noted that Container Store was smart in its inventory management during the holidays, avoiding the extreme discounting that has plagued many retailers dealing with tough conditions.

What's ahead for Container Store?

Container Store is pleased with how things have gone since the end of the holiday season. Reiff pointed to the annual Elfa sale, which traditionally has a significant impact on sales, and the company also expects comparable-store sales to pick up from the fiscal third quarter's decline.

Guidance reflected the positive impact from tax reform but was mixed in other aspects. The organizational retailer sees sales coming in between $850 million and $860 million, which narrows the previous range by $5 million on each side. Comparable-store sales should be flat to up 1%, which is an improvement from its wider previous range that saw a drop in comps of as much as 1%. However, adjusted earnings of $0.31 to $0.37 per share appear to aim more toward the lower end of Container Store's previous range.

Container Store investors didn't like what they saw in the announcement, and the stock dropped 9% in after-hours trading following the announcement. With progress remaining choppy, shareholders will once more have to endure a sticky start to the calendar year as they evaluate whether they have the patience to wait through Container Store's revitalization efforts.

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