Container Store Gets Itself Organized

The organizational retailer turned things around to start 2019.

Dan Caplinger
Dan Caplinger
May 15, 2019 at 10:30AM
Consumer Goods

The beginning of the year is often a good time to resolve to improve yourself, and that holds just as true for businesses as for people. For Container Store Group (NYSE:TCS), the recent past has been troubled, with plenty of ups and downs for the organizational-goods retailer as it has had to navigate turbulent conditions and internal struggles. Despite its commitment to conscious capitalism, Container Store has had trouble getting customers to buy in completely.

Coming into Tuesday's fiscal fourth-quarter financial report, Container Store investors hoped that the company would be able to get itself moving back in the right direction. The company's performance was even better than expected, and the retailer moves into a new fiscal year with high hopes that it can build even stronger upward momentum for the rest of 2019.

Closet with organizational shelves for shoes, hanging clothes, and accessories.

Image source: Container Store.

A great start for Container Store

Fiscal fourth-quarter results were a breath of fresh air for long-suffering investors. Revenue jumped almost 9% to $253.2 million, which was far better than the 5% top-line increase that most of those following the stock were looking for. Adjusted net income came in at $16.2 million, or nearly double what it made in the year-ago quarter, and that worked out to adjusted earnings of $0.33 per share. That number was better than the $0.30 per share consensus forecast among investors.

Fundamental performance was strong for Container Store. Comparable-store sales climbed 8.5%, helping drive the retail stores' sales performance up by more than 10% for the period. Unfortunately, poor results from the Elfa unit held the retailer back, as third-party sales of Elfa products dropped 6% for the quarter on weakness in key foreign currencies compared with the U.S. dollar. On a local currency basis, even Elfa was strong in its Nordic markets, but almost 12 percentage points of dollar-based strength proved unsurmountable for the segment.

Container Store worked hard to be as efficient as possible. Overall gross margin was consistent with year-ago levels, but the company did make progress in its namesake retail stores, where gross margin climbed to 57.8%. Container Store's optimization strategy worked well, although again, Elfa weighed on results because of high raw material costs and the weakness in Swedish currency.

Some moves to improve the balance sheet also helped. Interest expense dropped more than 20%, as the amendment late last year to Container Store's senior secured term loan facility paid dividends by cutting borrowing costs.

CEO Melissa Reiff celebrated the report. "This performance reflects the improvements we continue to make across all aspects of our business," Reiff said, "in merchandising and new product development, marketing, inventory management, and in-stock levels." She also cited what she called the "Marie Kondo effect" in bringing consumers along toward emphasizing organization.

Can Container Store keep climbing?

Management is optimistic. "We have plans in fiscal 2019 to strategically build on our progress to drive more brand awareness and market share gains," Reiff said, "specifically in our core custom closets business, where we recently launched our new Avera product line."

The retailer also set a high bar for the coming fiscal year. Sales are expected to be between $915 million and $925 million, with comps climbing around 2% to 3% year over year. Adjusted earnings of $0.41 to $0.51 per share would be consistent with Container Store's full-year results for the just-completed fiscal year, which came in at $0.42 per share.

Investors were ecstatic about the news, and the stock picked up 11% as it opened on Wednesday morning following the Tuesday-night announcement. The retailer will have to make more progress in order to reassure skeptical shareholders, but Container Store's latest news was a nice reminder of just how lucrative the organizational retail business can be when things are going well for the company.