After Getting a Beatdown, Can The Container Store Be Salvaged?

Source: The Container Store

After the market closed on July 8, shares of The Container Store Group (TCS) plummeted more than 14% to $23.20. Despite seeing sales increase year over year and adjusted earnings per share match what management reported last year, a shortfall on both the top and bottom lines combined with a dour outlook signaled that now might be the time to bail.

Is it possible that Mr. Market is overreacting to this news, or might now be the best time to consider investing in other specialty retailers like Michaels (MIK) or Lumber Liquidators (LL)?

The Container Store cannot please anybody it seems!
For the quarter, The Container Store reported revenue of $173.4 million. Although this represents a hefty 9% improvement over the $159.6 million management reported for the same quarter a year earlier, the results came in shy of the $174.2 million analysts anticipated. According to the company's press release, the revenue increase was driven entirely by a 10% jump in store count to 66 locations compared to the 60 it operated last year. This was, however, partially offset by a 0.8% decline in comparable-store sales.

Source: Yahoo! Finance and The Container Store

From a profitability standpoint, the business' position looks even worse. During the quarter, management chalked up a net loss per share totaling $0.07. This effectively matches the $0.07 in adjusted losses the company incurred in the first quarter of 2013 and came in worse than the $0.06 loss analysts expected. Despite seeing revenue increase, The Container Store was hit by rising costs, primarily in its cost of goods sold, which rose from 41.6% of sales to 41.9%, and its selling, general, and administrative expenses, which increased from 52.3% of sales to 52.6%.

Source: The Container Store

As a forecast for its 2014 fiscal year, management believes the retailer will see revenue come in between $820 million and $830 million and earnings per share somewhere between $0.49 and $0.54. Both of these expectations fall short of what Mr. Market had been hoping for, with revenue forecast to come in around $830.98 million and earnings forecast to hit $0.57.

Are there better prospects out there?
For investors looking to buy into specialty retailers, The Container Store might not be the best way to go. In addition to posting lackluster results and a mediocre outlook, the company's performance in recent years has been good but not great. Between 2010 and 2013, for instance, management reported a 32% jump in revenue from $568.8 million to $748.5 million as an aggregate comparable-store sales increase of 25% was accompanied by a 29% rise in store count from 49 locations to 63.

The Container Store Revenue (Annual) data by YCharts

While this is better than Michaels, which saw revenue climb 13% from $4 billion to $4.6 billion, The Container Store couldn't keep pace with Lumber Liquidators. Over a similar four-year time frame, Lumber Liquidators saw its revenue shoot up 61% from $620.3 million to $1 billion, driven by a 29% increase in aggregate comparable-store sales and a 43% rise in store count from 223 locations in operation to 318. Michaels, in contrast, reported a 10% rise in aggregate comparable-store sales but only a 6% increase in store count over the same time frame.

From a revenue perspective, investors can take solace in knowing that The Container Store's top line outgrew Michaels', but the same cannot be said from a profitability perspective. Between 2010 and 2013, The Container Store saw net income turn from a loss of $45.1 million into a gain of $8.2 million. Although this is better than seeing management report losses every year, it fell far short of Michaels, which saw its bottom line explode 156% higher from $103 million to $264 million.

The Container Store Net Income (Annual) data by YCharts

However, just as in the case of revenue, the best performer of the three was Lumber Liquidators. Over the past four years, the company's net income grew a jaw-dropping 194% from $26.3 million to $77.4 million. Like Michaels, Lumber Liquidators' bottom-line improvement was due to rising sales. But, the biggest contributor to both companies' results appears to be a reduction in costs, largely in the category of cost of goods sold for Lumber Liquidators and in selling, general, and administrative expenses and interest expense for Michaels.

Foolish takeaway
Based on The Container Store's results, as well as management's outlook for 2014, it makes sense that Mr. Market is none too pleased with the retailer right now. In addition to missing expectations, the company forecast a dour outlook and it's building a legacy for posting mediocre results on the bottom line and alright growth on the top.

While it's possible that management could improve operations moving forward, investors looking for modest growth but strong earnings might want to look into Michaels. However, for those who want the best of both worlds, Lumber Liquidators might be the best prospect in the long run. Not only does the company offer the Foolish investor a chance to see soaring profitability, but it has also demonstrated an affinity for growing sales in the process.