Why The Container Store Stock Fell as Much as 10% This Morning

What happened

Shares of The Container Store Group (TCS 1.85%), a retailer that sells closet and storage products, fell as much as 10% in morning trading on Wednesday. Although that decline was cut nearly in half by 11 a.m. ET today, it doesn't change the fact that the company's earnings outlook has darkened.

So what

The Container Store's fiscal first quarter of 2022 wasn't bad, per se. Comparable-store sales rose 5.1%, driven by the key custom-closets business, where sales jumped 14.7% year over year. That segment contributed 4.5 percentage points to the overall sales increase.

While that's good news, the company's general merchandise segment was much less impressive, with a year-over-year sales increase of just 0.8%, contributing the remaining 0.6 percentage points to overall comps. There are divergent results here, but the company is known for its closet products, so that's perhaps not such a bad thing.

On the bottom line, meanwhile, adjusted earnings per share (EPS) came in at $0.21, down from $0.36 in the year-ago quarter. Rising costs were a big headwind, leading to a contraction in margins.

Although the bottom-line result is hardly shocking given the current inflationary environment, the headwind posed by rising costs isn't likely to ease anytime soon.

For example, The Container Store is expecting sales to remain in line with its previous expectations, but it has lowered its earnings guidance. Previously, the outlook was for adjusted EPS to come in between $1.20 and $1.30, but this range has now fallen to $1.10 to $1.20. The low end is now the high end, which helps explain why investors are in a negative mood this morning.

Now what

There's no easy solution to the cost issues facing The Container Store, with selling, general, and administrative costs up a steep 10.7% year over year. Salaries and marketing were noted as key problem spots.

Although it doesn't appear as if this specialty retailer is struggling on the sales front, investors are clearly taking a glass-half-empty view of things on the cost side of the equation in the face of the broad and material inflationary pressures in the economy. Based on the lowered earnings guidance, that sounds like a reasonable call.