Throughout Tuesday's trading, investors seemed increasingly confident that The Container Store (NYSE:TCS) would post big-time earnings for its recently ended quarter, with the stock closing up nearly 7% by 4 p.m. Shortly thereafter, after-hours trading turned things back the other way as the company released guidance that failed to meet the hype. Wednesday's trading continued the drag downward, more than 14% today as of this writing.
There is no denying that The Container Store has a winning formula and a tremendous growth runway. Thus far, management has played its hand wisely. But this is another case of Mr. Market's mania, as the stock trades well above 100 times forward earnings prospects -- a rich figure even for the most hockey-stick growth-touting tech shop. Can investors possibly see a positive long term at today's pricing?
The Container Store is everything a compulsive organizer could ever want -- its products can bring to fruition even the most complex lifestyle efficiency fantasies. The company IPO'd in early November 2013 to market fanfare. The Container Store's $18 offering price leapt up to more than $40 per share by the time December rolled around.
For the company's first publicly reported quarter, things turned south as The Container Store posted a $9.5 million net loss, even though sales rose 7.3% to $188.3 million. On an adjusted basis, excluding IPO compensation costs, the company earned $5.2 million, or $0.11 per share -- slightly lower than the year-ago quarter's $5.3 million. Same-store sales grew 4.7%.
The future outlook is slightly better. Management guided for full-year per-share profits of $0.40, which is $0.02 ahead of estimates. Net sales are set for $754 million, slightly under estimates.
The road ahead
The Container Store has just 63 locations, giving each store a market value of roughly $30 million. Of course, that number is skewed, as the market is far more interested in the future number of stores than today's handful.
Still, this presents an all-too-common question for investors -- does the company's value warrant the super-premium price?
Obviously, this stock is not on the radar of even the most minimal of value investors. Paying 100 times projected full-year 2013 earnings is simply out of the realm of reason. But realistically, valuation plays no part in the investment thesis behind The Container Store. Investors in the stock are captivated by this niche retailer's amazing competitive position. As mentioned in the beginning of this piece, The Container Store is a retail machine. In today's retail environment, that's an increasingly rare accolade, reserved for just a few high-profile stores. For those who are concerned about pricing but love the company, the easy answer is to wait. At some point, IPO-mania will fade and the company's prospects will draw slightly more rational valuations. With a forward P/E under 50, you could start to build a case for The Container Store. Right now, though, I'd sit tight.