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Factors that Could Spell Potential Disaster for the Container Store Group

By Natalie O'Reilly - Jan 14, 2014 at 8:25PM

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A look at the top three threats that could dramatically hurt the Container Store's sales and overall growth.

You would think that The Container Store Group ( TCS 1.79% ) has nothing threatening its future growth thanks to its unique concept, but guess again. Like all companies, The Container Store and its shareholders have to anticipate possible threats to its business model and plan accordingly in case something hurts short or long-term growth. Anything is possible within the retail industry, and Foolish investors should be aware of the top three threats that are likely to cause trouble for The Container Store. Let's take a closer look at these threats and assess their likelihood of harming the company's business model.

The emergence of new indirect or direct competition
A competing retailer specializing in organization and storage solutions could always establish its own brand to compete with The Container Store. At the moment, The Container Store already deals with its fair share of indirect competition. That includes Wal-Mart ( WMT 1.08% ), Target ( TGT -1.86% ), and Bed Bath & Beyond ( BBBY 4.03% ), as they sell storage accessories on a smaller scale and for a lower price. These companies have ultimately taken consumers from The Container Store because they provide a broader range of products as well.

Luckily, The Container Store has not had to deal with any direct competition so far. However, this could all change if a business did come along that wanted to challenge The Container Store's product offerings and customer service. The Container Store could possibly win the war, but it could still end up losing some of its target audience, a portion of its market share, and a certain percentage of its net sales in the process.

Downturn in the economy
Economic recessions place a burden not only on consumers but also on retailers. Over the past decade, Americans have endured several recessions, including the one in 2001 and the Great Recession that began in 2007 as a result of the housing market crash. Downturns in the economy bring with them issues such as unemployment, company cutbacks, less disposable income, and a decline in consumer spending.

Like any company, The Container Store does not have the means to stop the effects of a recession. In fact, given its dependence on the spending habits of high-end consumers and its non-essential merchandise, it is even less durable in a recession than the average retailer. 

A recession often plays in the favor of retailers like Wal-Mart or Target that generally offer the lowest prices. The Container Store's net sales will likely decrease in any economic downturn, which will put pressure on how the company pays its expenses; this will ultimately lead to a profit reduction. This is not to say an economic pullback is around the corner, of course, but investors should be aware that The Container Store sells non-essential products that are the first to go in an economic downturn.

Designer trends
A style or trend may be in fashion one minute, and the next minute it's out. This is true for most things in the industry, and The Container Store should be prepared for when designer trends go in and out of style. Interior design trends are constantly changing, and this can threaten sales. The way people organize, showcase, and store their belongings is never constant as people continue to gather ideas from home improvement shows, store displays, new housing development designs, and each other.

The Container Store could have to eliminate or highly discount certain products while adding others to satisfy its customers. This could threaten business over various periods of time depending on how fast The Container Store can deliver the hottest and newest trends. As we know, nothing is ever set in stone within the retail industry.

Foolish takeaway
Any of these threats could potentially harm The Container Store's business at any point in the near future. Foolish investors should realize that if The Container Store is aware of these threats ahead of time and devises an effective strategy to combat them, it can emerge as a much stronger business in the long term. Being aware of these challenges and keeping an eye on the company's next moves will not only make you a better investor but will lead to a deeper understanding of The Container Store as part of your portfolio. These aren't the only threats The Container Store has to contend with, but they are the biggest and potentially the most damaging. Foolish investors should ignore them at their own risk. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$139.00 (1.08%) $1.49
Target Corporation Stock Quote
Target Corporation
TGT
$242.97 (-1.86%) $-4.60
Bed Bath & Beyond Inc. Stock Quote
Bed Bath & Beyond Inc.
BBBY
$18.58 (4.03%) $0.72
The Container Store Group, Inc. Stock Quote
The Container Store Group, Inc.
TCS
$11.35 (1.79%) $0.20

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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