A tough quarter
Management at The Container Store (TCS -3.05%), a specialty retailer focused on closet and general storage needs, tried to put its best foot forward when it reported earnings after the close on Feb. 8. For example, it highlighted that sales in the third quarter of fiscal 2021 were up nearly 17% compared to the same quarter of fiscal 2019. Earnings per share of $0.27 were way higher than the $0.05 per share earnings in the same quarter of 2019.
But the market chose to focus on the fact that sales were down 3% from the third quarter of fiscal 2020. Earnings, meanwhile, were down from $0.42 per share in the year-ago period. These two different time periods are important. Basically, when people were forced to stay home to work or just socially distance they appear to have taken on some home improvement projects, including things that The Container Store is focused on, like closet makeovers. That resulted in windfall sales and earnings in fiscal 2020. Now that the world is starting to get back to a more normal environment, business is starting to cool off.
Wall Street has a habit of taking things to extremes, so it shouldn't be surprising that the stock rallied strongly when sales were benefiting from pandemic-related buying. And, now that the benefit is starting to wane, investors are selling. The stock is off over 50% from its early 2021 highs, including today's over 20% price drop in early trading. But is that a fair assessment of the company's prospects?
More near-term pain
In some ways that answer is likely to be yes, but it depends on the time period you are looking at. For example, The Container Store warned that its fourth-quarter fiscal 2021 sales will be lower by 6% year over year, pulling out the benefit of an extra week in fiscal 2020. Earnings are projected to be around $0.24 per share, down sequentially from the current quarter and the $0.71 per share it turned in a year ago. Clearly that's not good news.
However, nothing goes up or down in a straight line and the roughly $400 million market cap retailer is still in growth mode. Notably, it is working to integrate its recently announced acquisition of Closet Works, which expands its reach into higher-end wood closet makeovers. And it is looking to add at least 100 more stores to its current count of 94 stores. Although that includes new small-store formats, which may have different profit profiles than its current locations, The Container Store is basically looking to double in size over the longer term. That should keep revenue, and hopefully earnings, heading higher over a multi-year period.
Two ways to think about it
The buy or sell question here really boils down to what you are hoping to get from owning The Container Store. If you bought it thinking it would benefit from the efforts to slow the spread of the pandemic, then you should probably bail, as that story appears to be over. If you are thinking long-term and want to own a growing retailer with a unique niche, then it might be of interest to you. That doesn't mean that the stock is about to reverse course and rocket higher, but a growing business should, over time, support a rising stock price, especially if The Container Store can deliver on the plan to more than double its store count.