The history of The Container Store Group (TCS +0.00%) began in 1978 when the founder and current CEO Kip Tindell opened a specialty retail store in Dallas. The company has had its sights on expansion ever since and has gone through several stages of raising capital to fund it. In 2007, a majority stake in the company was purchased by Leonard Green & Partners in order to fund future growth. In November, the company was offered to the public, presumably to raise money so that it could grow some more.
Along the way, the company has racked up $342 million in long term debt, compared to only $10.8 million in cash. With losses of millions of dollars in the past few years, it might be time to question if this company even has the potential to be a large retailer. Although there are many situations when "you have to spend money to make money," how The Container Store has been spending it does not seem to yield the cash to keep the business alive. In other words, it might be time to close the lid on The Container Store.
Are more stores the solution?
In November 2004, there were 33 Container Store locations. I was unable to find financial statements dating back that far to determine if the company was profitable. Here we are today with 63 stores, and the company is still not turning a profit.That has been a very long time for the company to figure things out. The CEO claims that the company can go from 63 stores in the US to 300 "handily," but history shows that increasing the number of locations does not seem to increase profitability.
As far as I can tell, the company is fueling its growth by taking on debt, with the interest payments offsetting any increase in revenues. It is hard to back up the historical accuracy of this claim for lack of financial statements, but in the most recent year, the company had $10.4 million in income from operations. This money went to paying the $16.9 million in interest expense for that year, which played a part in the net loss for the year. That's right, the company is currently spending more money on paying the interest for its debt than it is making. The company has negligible cash on hand, so any future growth would have to come from issuing more debt, which means a higher interest expense. I would really like to see the Container Store be able to expand without issuing more debt before considering investing in it, but I don't think the company can even sustain itself without issuing more debt.
Another interesting piece of financial information is the comparison of the increase in sales to the increased costs due to those sales. In the most recent quarter, net sales increased by $12.9 million, or 7.3%. In that same quarter, selling, general, and administration expenses (primarily due to the increase in sales) increased by $7.1 million, or 8.7%. You will notice that as sales increased, expenses increased even faster. This is just another signal that the bigger the Container Store gets, the less efficient it may become at generating money.
The CEO is helping the cause...right?
A large expense for the Container Store is the annual compensation of CEO William A. Tindell along with other key executives, which is cause for further investigation. Based on Morningstar data, the 2012 compensation for Mr. Tindell was just over $2 million. At first glance, this does not seem unreasonable for the CEO of a public company. However, when this is viewed across the scope of the company and compared to competitors Bed Bath & Beyond Inc (BBBY +0.00%) and Wal-Mart Stores (WMT +0.40%), some striking differences become apparent.
| 2012 CEO Compensation | 2012 Sales | Cash Holdings | Compensation as Percentage of Sales | Compensation as Percentage of Cash | |
|---|---|---|---|---|---|
| TCS | $2 million | $633.6 million | $10.8 million | 0.316% | 18.52% |
| BBBY | $15.9 million | $9.5 billion | $694.2 million | 0.167% | 2.29% |
| WMT | $18.1 million | $446.95 billion | $8.73 billion | 0.004% | 0.21% |
I cannot foresee a company surviving if the CEO takes close to 20% of its cash every year as a salary. Especially considering that the performance of the executives has been less than satisfactory; having lost the company over $85 million over the past four years.
IPO fundraising probably won't lead to profitability either
In November 2013, the company raised $237 million in net proceeds after going public. As stated in the most recent quarterly report, here is the breakdown of how that money was spent.
$205.8 million- paid as a distribution to holders of Senior Preferred Stock
$31 million- paid down a portion of debt
$208 thousand - used for other operating activities
To me, this looks like a case of the farmers eating their own seeds. The money from the IPO could have been used in some sort of productive way to take steps toward profitability in the future, but as far as I can see, only a fractional percentage of the money was used to improve the company. Although paying down $31 million of debt is very productive, I discredit this because the company also took out a brand new $90 million loan this year to pay Senior Preferred Stockholders some more. If I were to invest $10,000 in a company, I would hope that the company could find a way to productively use more than $8.70 of it.
In conclusion, an important date for investors
Although I cannot see responsible logic in the financial strategy that The Container Store has been using with the investors' money since the IPO, I only have a small glimpse at the inner workings of the company. Perhaps there is potential for an epic turnaround and for that reason some are still looking to invest. I would pay careful attention with what happens to the stock after April 29 of this year. Currently, approximately 31 million of the 47.9 million outstanding shares of common stock are held by executives, directors, and LGP (owns 57% of stock) and are restricted until that date. Once these people are allowed to sell their stock, see what they do.
