IPO-related expenses caught up with The Container Store Group (NYSE:TCS) in its latest financial release. When the company went public in November with 12.5 million shares priced at $18 per share, the sharp rise in share price during the first day of trading caught investors by surprise as shares closed at $36.20.
The company's sales improved in the third quarter ended Nov. 30, but revenue from its Elfa-branded storage system decreased. After the news, The Container Store's shares fell 14% to $39.01.
While The Container Store's net sales grew 7% to $188.3 million, the company incurred a net loss of $9.5 million, or ($1.39) per share. The company noted strong performance among new and existing stores and stated that comp store sales rose by 4.7%, which surpassed the consensus estimate of 4%. The market expected earnings of $0.08 per share and $188.9 million in revenue.
Successful (and expensive) IPO
The increase in third-quarter sales was not enough to counter the 8.7% rise in selling, general, and administrative, or SG&A, expenses, which rose to $88.8 million. The expenses associated with the IPO caused SG&A as a percentage of net sales to increase by 60 basis points. The third quarter's net loss of $9.5 million included $14.6 million worth of expenses for IPO-related stock options.
Third-quarter adjusted net income, which excludes items unrelated to ongoing operating performance such as IPO-related expenses, was $5.2 million or $0.11 per diluted share. With the effect of the IPO excluded, the latest results do not vary much from fiscal third-quarter 2012's net income of $5.3 million and diluted EPS of $0.11.
Full-year fiscal 2013 forecasts estimate adjusted net income of $0.40 per share and sales of $754 million . Analysts estimate that The Container Store's full-year results will be $0.38 per share and $756.2 million in revenue.
Lower expenses at other specialty retailers
At The Container Store, SG&A expenses made up almost half of net sales. In contrast, at rival specialty retailer Williams-Sonoma (NYSE:WSM) SG&A expenses for fiscal 2013's third quarter made up 29.8% of net revenue and showed an improvement from the same period in 2012. The company's net revenues rose 11.3% to $1.05 billion. Direct-to-customer (DTC) revenues did better than retail revenues, generating 49% of the quarter's total net revenues. Higher sales at Pottery Barn and West Elm contributed to strong results in DTC and retail.
Furniture and room decor stores West Elm and Pottery Barn are the company's top-growing brands, along with PBteen, which specializes in furniture and room decor for teens. Because of the outperformance of the third quarter, the company raised its guidance for fiscal 2013. Revenues for the year is expected to range between $4.29 billion and $4.35 billion, while diluted EPS is estimated to range between $2.76 and $2.83. .
Another rival, Bed Bath & Beyond (NASDAQ:BBBY), reported SG&A expenses for fiscal 2013's third quarter that were 26% of net sales. The company's third-quarter net sales rose 6% to $2.87 billion and comp-store sales also rose but lower than the increase reported in the third quarter of 2012. Diluted EPS for the third quarter was $1.12 and came in just below the expected $1.15 per share. The market responded to the missed target and shares fell by about 12% after the earnings announcement .
Heavy coupon use by customers can be partly to blame for the company's diminishing returns. Playing it safe, the company lowered its fiscal 2013 guidance to $4.79-$4.86 from a previous estimate of $4.88-$5.01. Analysts expect Bed Bath & Beyond's EPS for the year to come in around $5.01. The company is currently working on store expansion; by the end of the current fiscal year, it expects to have 33 new stores opened. There is also ongoing work related to store renovations and store repositioning in certain markets .
My Foolish conclusion
The Container Store, much like its rivals, will need to monitor and contain its costs moving forward. As the business absorbs its IPO-related expenses, future operating revenue and expenses should provide a clearer picture of how well the company will grow its business.