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Dismal Holidays Hurt Container Store Group

By Dan Caplinger – Updated Apr 20, 2019 at 10:50PM

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The organizational retailer didn't get the bump many investors had hoped to see.

It's been a tough several years for Container Store Group (TCS 2.09%). The organizational-goods retailer and well-known follower of conscious capitalism has grappled with challenges related to e-commerce, along with more industry-specific challenges that have held back its business. As with many retailers, a lot of Container Store's optimism centered on getting good results during the key holiday period.

Coming into Tuesday's fiscal third-quarter financial report, Container Store investors wanted to see modest growth in sales and earnings. Instead, the company faced another setback, and it now expects some new headwinds to affect full-year results as well.

Closet with organizational furniture separating shoes, blouses, dresses, and accessories.

Image source: Container Store.

Container Store can't clean up

Container Store's fiscal third-quarter results were far from what most investors were looking forward to. Revenue fell 0.6% to $221.6 million, which was well below the 2% top-line gain that those following the stock had hoped to see. Adjusted net income was down more than 30% from year-ago levels to $3.5 million, and the resulting $0.07 per share in adjusted earnings badly lagged the $0.12-per-share consensus forecast among investors.

Container Store's fundamentals reflected deteriorating conditions. Comparable-store sales fell 0.8%, reversing gains from earlier in the fiscal year. It took incremental sales from new stores to push the retail segment's revenue up just 0.5%. Elfa took a huge hit during the period, with third-party net sales falling almost 13% from the year-earlier quarter. The company cited about a 7-percentage-point reduction in revenue from adverse currency impacts, and lower sales in the Nordic and Russian markets also weighed on the Elfa unit's performance.

Container Store did make some marginal progress in key areas. Gross margin climbed a tenth of a percentage point to 58.7%, reflecting the efforts the company has made to contain costs despite higher costs for promotional activities. Gains would have been higher without Elfa's big negative contribution, in which a weak Swedish krona and high direct materials costs were especially noteworthy. Container Store also cut its interest expense by 18%, using an amendment to its loan facility to produce savings.

However, other pressures hurt the company. Overhead expense was higher by 5%, and although some of the increase came from timing-related accounting impacts, negative comps also took away the benefit of some of the money Container Store spent in areas such as marketing.

CEO Melissa Reiff accentuated the positives. "We were very pleased with our custom closets business," Reiff said, "which once again delivered strong results, generating [1.8 percentage points] of positive comparable store sales, and our other product categories outside of holiday also generated positive comparable store sales growth." However, the CEO admitted that the holiday-centered departments didn't keep up with the rest of the company.

Check out the latest Container Storeearnings call transcript.

What's ahead for Container Store in 2019?

Container Store also didn't hesitate to look forward. "We are encouraged with the strong start to our fourth quarter," Reiff said, and investors hope that company efforts to build up the custom closets business and find other ways to encourage stronger sales activity overall.

However, Container Store's guidance reflected more modest expectations for the full 2019 fiscal year. The company said it now expects to see sales come in at the lower end of its previous range of $885 million to $895 million. Although comps should be on the stronger end of the 1.5% to 2.5% guidance from last quarter, adjusted earnings of $0.41 to $0.51 per share will probably prove too ambitious, and the company is likely to end up at the lower end of that range, or even potentially a bit below the lower end.

Container Store investors didn't react well to the news, and the stock plunged 18% in after-hours trading on Tuesday following the announcement. It's going to take sustained strong performance to get Container Store out of its difficulties, and shareholders are likely to remain skeptical until they see more concrete evidence of a full recovery.

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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