On Tuesday January 7th, 2014, after the market closed, The Container Store (NYSE:TCS) reported earnings for its third quarter of the company's 2013 fiscal year. After failing to impress on both revenue and net income, the company's shares fell more than 13%, more than eliminating the company's 6.54% gain for the day. However, is it possible that The Container Store could offer some attractive prospects to the Foolish investor following its drop, or is it more likely that the company should be stayed away from at all costs?
You can't always get what you want!
For the quarter, Mr. Market expected the company to earn revenue of $188.9 million, 7.7% higher than the $175.4 million it managed to earn in the same quarter a year earlier. Had analysts been correct, the company's year-to-date sales would have fallen at $532.3 million, 8.7% higher than the $489.7 million that management tabulated for the first three quarters of 2012.
Unfortunately, the company narrowly missed expectations with revenue coming in at $188.3 million. Despite opening two new stores for the quarter (and six for its 2013 fiscal year thus far), bringing its number of locations to 63, revenue disappointed because of an 11.3% drop in the company's Elfa third-party sales. To make matters worse, the company expects full-year sales to come in at $754 million, slightly below the $756.17 million forecasted by Mr. Market.
Irrespective of the earnings miss though, the company's revenue for the quarter wasn't necessarily "bad". While sales rose 7.3%, the company's retail operations (everything excluding its Elfa third-party sales) rose 10.8% compared to what it saw a year earlier. This was driven, in part, by the 4.7% rise in comparable store sales the company saw.
On top of rising sales, The Container Store saw a slight change in its cost structure for the quarter. Compared to the same quarter a year ago, the company's cost of goods sold fell from 40.6% of sales to 40%. Though this is a positive development, it was offset by a rise in its selling, general, and administrative expenses, which rose from 46.6% of sales to 47.2%. While these two changes in cost cancel one another out, the company saw its bottom line hurt by increase stock-based compensation. During the quarter, management recorded stock-based compensation related to its IPO of $14.6 million, compared to $157 thousand a year earlier.
Due to these changes in revenue and the company's cost structure, The Container Store saw its bottom line worsen for the quarter. As opposed to the $15.6 million net loss that management reported last year, the company lost $25.1 million this year. This resulted in a loss per share of $1.39, far worse than the $0.08 gain that Mr. Market anticipated.
When it comes to specialty retailers, The Container Store isn't that special
Over the past three fiscal years, results for The Container Store have been reasonable but not anything special. Since 2010, sales have grown 24.2% while the company's net loss has narrowed from $45.1 million to $0.1 million. Although these signs are positive, they aren't what investors might call amazing.
In comparison, other specialty retailers like Lumber Liquidators (NYSE:LL) and Tile Shop Holdings (OTC:TTSH) performed far stronger. Over the past three years, sales at Lumber Liquidators outpaced The Container Store, growing 31.1% from $620.3 million in 2010 to $813.3 million by the end of 2012.
In addition to experiencing slightly higher revenue growth, the specialty retailer saw its net income jump 79.1% from $26.3 million to $47.1 million. While the company's revenue has risen far faster than competitors like Home Depot and Lowe's Companies, its net profit margin was on par with Home Depot's and surpassed Lowe's.
When it comes to revenue growth, The Container Store and Lumber Liquidators performed well, but neither could compare to Tile Shop Holdings. Over the past three years, Tile Shop Holdings has grown its revenue a whopping 35% from $135.3 million to $182.7 million. This is most certainly a strong growth record, but the company's bottom line has suffered a bit.
Net income for the company rose by 5.7% between 2010 and 2011, but fell into negative territory because of a change in the fair value of some of its warrants. Removing this expense as a one-time thing would have yielded a growth in net income of 11.1% between 2010 and 2012. This is most certainly better than what The Container Store experienced over this timeframe, but far worse than the results Lumber Liquidators posted.
Based on The Container Store's results for the quarter, the Foolish investor should keep in mind that top line results weren't great but most certainly weren't poor. On the other hand, the company's bottom line is an area that investors should dedicate more time and attention to before considering investing. The good news is that a portion of the company's net loss was likely a one-time thing that stemmed from its IPO, but the bad news is that, even if this weren't factored in, the company would have still come up short. I don't know about you, but I would rather buy something making money like Lumber Liquidators or Tile Shop Holdings than to hope for an improvement in business that may never come.
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