For the second quarter of 2014, The Container Store (NYSE:TCS) posted negative same-store sales and only slight revenue growth, causing its shares to drop more than 10% in after-hours trading Monday. There was no mention of a "retail funk" this time around, but CEO Kip Tindell stressed his high expectations for the upcoming holiday season instead of dwelling on sluggish sales trends.
Digging a little deeper into the earnings bin, here's what stood out in the latest quarter:
1. Still some funk in the financials
It's evident that a rebound has yet to occur in terms of The Container Store's foot traffic. Management expected to see flat-to-positive comps, but instead the slump continued. Same-store sales were down 0.4% year-over-year, a modest improvement against the first-quarter's 0.8% drop.
Negative comps put a lid on revenue growth, but the company did post a profit for the first time as a public company. Here's a high-level look at some key financial results:
- Net sales of $193.2 million, up 5.2%
- Consolidated gross margin of 58.8%, up 40bps
- Adjusted net income was $5.1 million versus $3.7 million last year
It's hard for investors to get too excited about single-digit growth at a newly minted public company. For perspective, revenue growth of 5.2% is well below the first-quarter's increase of 8.6% and the company's 3-year average of 9.58%.
Looking ahead, guidance was also revised downward. Management expects "flat-to-down" comps in the third quarter and "low to mid-single digit" comps in the fourth quarter. Previous guidance envisioned positive same-store sales in the latter half of the year.
2. Profit margins are a mainstay for now
Container Store boasts some of the highest margins in the retail business, and this was one aspect that remained resilient. The company's gross margin increased 40 basis points year-over-year to 58.8%, an indication that pricing power remains intact.
Management also noted that its rewards program, POP! or "Perfectly Organized Perks," reached 1 million enrollments in less than a few months, and 50% of store sales are derived from POP! Star members. High-frequency customers account for the lion's share of Container Store's sales, and they tend to be the most profitable audience as well. As we pointed out before, this will be a lever The Container Store can pull on to increase engagement, traffic, and profit margins down the road.
3. It's all about the buzzer beater
While we're only halfway through the fiscal year, The Container Store seems to have its sights set on the upcoming holiday season. Tindell says, for better or worse, selling storage solutions is akin to a basketball game, and it all boils down to fourth-quarter performance.
This is when The Container Store's annual elfa sale drives foot traffic, and it also happens to be a period that was deeply affected by last year's volatile winter weather patterns. Weather permitting, comps should benefit due to lackluster prior-year results.
Management expects 70% of earnings to come in the fourth quarter, up from a typical level of 60%. Meanwhile, the company will benefit from two new rollouts by year's end: Contained Home services (formerly known as "ATHOME") and TCS Closets. Both of these organizational services are expected to reach every store by the end of 2015, indicating that early sales have been up to snuff. What's more, the average ticket price on TCS Closets is expected to be "much more than the $2,000 average ticket" for the Contained Home service.
The takeaway for investors
The Container Store is more than halfway through its rookie season as a public company, but it has yet to work out all of the kinks in its game. Store growth remains on-track for a 12% square footage increase, but the market is yearning for better comps and top-line performance. After an uninspiring string of results, investors are hoping that management delivers a slam-dunk in the fourth quarter.