Custom Closets Lift Container Store

The organizational retailer got things turned around to start a new fiscal year.

Dan Caplinger
Dan Caplinger
Jul 30, 2019 at 6:11PM
Consumer Goods

Retailers are always looking for ways to refresh their product lines, and for Container Store Group (NYSE:TCS), the quest to find ways to woo new customers never ends. The organizational-goods retailer has certain products that it always highlights to shoppers, but more recently, it's tried to adopt some new concepts to appeal to a slightly different audience.

Coming into Tuesday's fiscal first-quarter financial report, Container Store investors wanted to get the new fiscal year off to a good start. The company wasn't able to make a profit, but sales growth was stronger than expected, and many believe that the retailer's custom closets business could be a game-changer for its long-term prospects.

Closet will items well-organized into different sections and drawers.

A Container Store custom closet. Image source: Container Store.

Container Store gets organized

Container Store's fiscal first-quarter results kept up positive momentum for the company. Revenue rose 7% to $209.5 million, which was stronger than the less than 5% growth that most investors were expecting. An adjusted net loss of $4.1 million was consistent with year-ago levels, and the resulting $0.08 per share loss was a bit better than the consensus forecast among those following the stock for $0.10 per share in red ink.

The organizational retailer saw strong fundamentals yet again in its core business. Comparable-store sales were higher by 7.8%, keeping up its pace from past quarters. Once again, Container Store had to deal with weakness in its Elfa line of organizational products, with third-party net sales falling more than 8% due in large part to the strong U.S. dollar compared with key foreign currencies. Yet Elfa is such a small part of the company's overall business that the decline didn't really hurt it very much.

But Container Store did have some obstacles to overcome. Gross margin was down almost 1.5 percentage points to 57.2%, as the mix of products sold wasn't quite as profitable, and marketing and merchandising campaigns also weighed on margin levels. Overhead expenses rose by only 2%, helping to keep overall costs in check, and interest expense was down 28% from year-ago levels because of amendments to a key credit facility.

CEO Melissa Reiff was happy with the company's progress. "Our reinvigorated marketing campaigns and refreshed merchandise assortment across our core custom-closets business and other product categories resonated with customers, both in store and online," Reiff said. She also noted that a nimbler organizational structure has Container Store better able to respond to new growth opportunities.

What's next?

Container Store has high hopes. In Reiff's words, "Combining our agility with our merchandising strategies that include a comprehensive custom-closets offering, freshness and newness across all product categories, and our unique solutions-based selling approach, we believe we are well positioned for the remainder of the fiscal year and beyond."

Custom closets will play a vital role in its future. Container Store saw 11.1% growth in that part of its business in the second quarter, and that contributed 5 full percentage points of comps growth to the overall organization. The value-added nature of custom closets make them more attractive to shoppers who don't necessarily want to do the detail work in coming up with the perfect organizational system for them, and the retailer's results show that the concept is working well.

Container Store didn't make major changes to its guidance. The company still thinks that revenue will finish the year between $915 million and $925 million, and comps should be up 2% to 3%. It also still expects adjusted earnings to come in between $0.41 and $0.51 per share.

Container Store investors were pleased with how the company did, and the stock picked up more than 9% in after-hours trading following the announcement. With conscious capitalism remaining at the core of the organizational retailer's mission, Container Store's shareholders hope that the good work it's doing will turn into profits in the near future.