The Container Store.

The Container Store (NYSE:TCS) stock is down by more than 50% year to date, as investors are clearly disappointed with the company's financial performance over the last two quarters. Retailers are going through a tough period lately, and those linked to the real estate sector are being particularly affected by unstable demand.

On the other hand, The Container Store has a smart and differentiated business model, and the company has a lot of room for growth considering its relatively small size. Should you seize the opportunity to buy The Container Store, or is it better to run away from the company before things get worse?

A retail "funk"
After reaching a high of more than $46 per share by the end of 2013, The Container Store stock has come down to about $23 per share, as the company's financial performance over the last two quarters was below expectations. According to management, these problems are mostly due to dismal industry conditions across the retail sector, in the words of CEO Kip Tindell: 

We thought our sluggish sales were all because of weather and calendar shifts that began last November and continued into the spring, but now we've come to realize it's more than weather and calendar. Consistent with so many of our fellow retailers, we are experiencing a retail "funk." 

Other retailers exposed to the real estate industry are confirming that the industry environment is quite challenging. Flooring specialist Tile Shop (NASDAQ:TTS) is down more than 65% over the last year as growth has materially slowed in recent quarters. The company reported a 14.7% sales increase in during the second quarter, but same-store sales increased only 0.3%.

Source: The Container Store.

Bed Bath & Beyond (NASDAQ:BBBY), meanwhile, offers some cause for hope. After missing estimations for three consecutive quarters, the company announced better than expected sales and earnings for the quarter ended on Aug. 30. Profit margin was under heavy pressure as the company is resorting to coupons and competitive prices in order to accelerate sales growth in a challenging environment. However, it's good to see this industry giant making progress, which could indicate that things could gradually improve for companies in the business over the coming months.

A differentiated business
The Container Store has a smart business model that makes it a differentiated player in retail via a deep focus on storage and organization products. According to management, The Container Store is the only national retailer solely devoted to the category. This level of specialization has important advantages when it comes to feeling the pulse of its customers and anticipating their needs. Deep relationships with vendors and exclusive products are strategic additional sources of competitive strength for the company.

The Container Store is focused on providing integral solutions for its customers as opposed to selling items on a stand-alone basis, and it relies on a highly knowledgeable workforce of well-trained employees providing high-quality advice to customers. Full-time employees receive more than 260 hours of training in their first year, a key point of distinction when it comes to service.

The company is expanding its ATHOME personalized organization service with remarkable success. ATHOME organizers go to customers´ homes and design tailored storage solutions for them using The Container Store products. The average ticket purchase for ATHOME customers is an impressive $2,000 versus an average ticket value in the area of $60 for a typical customer.

Even after reducing sales guidance to reflect recent weakness, management is expecting a sales increase of between 9.5% and 10.9% for the full fiscal 2014 year to between $820 million and $830 million. Same store sales are forecasted to expand between 1.5% and 2.5% during the year. Growth may be slowing down, but sales are still moving in the right direction.  .

The company has not changed much over the last quarters, and other players in the industry are going through similarly challenging periods, so there are legitimate reasons to believe the problems affecting The Container Store are mostly related to economic headwinds rather than to company-specific issues.

The Container Store has 66 stores, and management believes it has room for more than 300 locations in the U.S. This means enormous room for growth in coming years. So even if growth rates fluctuate on a quarter-to-quarter basis, chances are the company will continue expanding successfully over time.

Key takeaway
The recent slowdown in The Container Store seems to be mostly due to industrywide factors, which should be transitory by nature. A relatively small size in a challenging sector makes The Container Store a risky investment; on the other hand, the company's long-term growth story still looks quite promising. If anything, the recent dip in The Container Store could be a buying opportunity for long-term investors who can handle short-term uncertainty.