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Elfa Lifts Container Store Sales, but Worries Remain

By Dan Caplinger - May 23, 2018 at 11:23AM

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Find out how the retailer expects to move forward in the new fiscal year.

Container Store Group (TCS 5.62%) has faced some major challenges in recent years. The entire retail sector has struggled through tough times in the wake of rising competition from e-commerce, and for the organizational goods retailer in particular, efforts to remain true to its conscious-capitalism approach haven't helped the stock regain the substantial amount of ground it has lost over the past five years.

Coming into Tuesday's fiscal fourth-quarter financial report, Container Store investors wanted to see a nice boost in earnings on solid sales growth. The retailer did well on its top line, but profits remained under pressure. Nevertheless, the company remained upbeat, pointing to positive momentum from its internal initiatives aimed at stoking Container Store's long-term growth prospects.

Closet organizational system with clothes hanging, shoes put away, and accessories placed in convenient locations.

Image source: The Container Store.

How Container Store finished its fiscal year

Container Store's fiscal fourth-quarter results were mixed in most people's eyes. Revenue climbed 5% to $232.8 million, which was slightly better than the 4% growth rate that most of those following the stock were expecting to see. However, tax-reform impacts caused the company to report a GAAP loss, and even after accounting for that impact, adjusted net income that fell 3% to $8.4 million worked out to adjusted earnings of $0.18 per share. That figure was flat from year-ago levels and fell short of the $0.23 per share consensus forecast among investors.

Container Store attributed much of the gains it enjoyed to its Elfa product line. Comparable store sales were higher by 2.7%, reversing a small loss during the holiday quarter three months ago, and the company said that the success of its annual Elfa sale was the primary contributor to the increase. Overall Elfa third-party sales rose 5%, with the unit benefiting from favorable currency impacts on its dollar-denominated revenue.

The retailer also saw some internal performance improvement. Gross margin rose a full percentage point to 58.6%, with the company's optimization plan helping to offset a greater proportion of sales from promotional campaigns during the quarter. Overhead expenses were higher by 5%, but the growth rate slightly trailed gains in sales, as savings and efficiency efforts paid off.

However, there were some troubling aspects to the report. Without currency impacts, Elfa third-party sales would have been down due to weakness in Nordic markets during the quarter. In addition, a nearly 80% rise in net interest expense accompanied the need last year to amend its senior secured term loan facility, showing Container Store's potential sensitivity to the current rising interest rate environment.

CEO Melissa Reiff aimed to celebrate a solid year. "We are very pleased to have concluded our fiscal 2017 with our strongest quarter of comparable store sales performance of the year," Reiff said, "driven by an acceleration in our important Custom Closets business as well as in our other product categories." The CEO also pointed to the impact of efficiency efforts to boost margin figures.

Can Container Store recover this year?

Container Store remains optimistic about its future. In Reiff's words, "We remain committed to driving improved performance on both the top and the bottom line as we build on the progress we have made across each of our key strategic priorities." That includes cost controls, new store openings and relocations, and improvements in distribution and technology to enhance the customer experience.

Yet Container Store's new guidance for the coming fiscal year didn't quite show the level of enthusiasm that most shareholders had hoped to see. The company believes that it should see revenue of $880 million to $890 million, with two new stores and two relocations of existing stores. Comparable-store sales, though, will likely be flat to up 1% once again, and adjusted earnings projections of $0.35 to $0.45 per share were a slight disappointment compared to the consensus forecast among investors for $0.42 per share on the bottom line.

Container Store investors didn't seem happy with what they saw as a setback, and the stock fell 11% in morning trading Wednesday following the late-Tuesday announcement. Until Container Store can show better progress in actually driving greater shopping activity, it'll be difficult for its internal initiatives to generate the forward momentum that impatient shareholders really want to see.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of The Container Store Group. The Motley Fool has a disclosure policy.

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