Can Container Store Start 2015 on a Positive Note?

Source: Container Store.

In 2014, it was hard to find bad-performing stocks, as the market put in a sixth straight year of gains. For Container Store Group (TCS +0.00%), though, its first full year as a public company was a disaster for investors, with the stock plunging almost 60% last year. Amid falling same-store sales and worrisome trends in overall revenue, confidence in Container Store's future prospects took a huge hit. Yet as shares have started to stabilize, though, shareholders hope that the worst is over for the company and that customers might return in force to take advantage of the retail chain's organizational products. Moreover, some enthusiasm both from the professional analyst camp and from an activist hedge fund could help support the stock in the future. Let's take an early look at what's been happening with Container Store over the past quarter and what it's likely to say in its earnings report on Thursday afternoon.

Stats on Container Store Group

Source: Yahoo! Finance.

Can Container Store get its earnings organized better this quarter?
Investors are more pessimistic than they were a few months ago about Container Store's earnings, having slashed their views on November-quarter earnings by 30%. Yet even though the stock has fallen 14% since early October, share prices have bounced off their lowest levels since then.

Just about all of the damage done to Container Store's stock came following its fiscal second-quarter report. On its face, 39% growth in adjusted net income seemed like a reasonably promising performance, coming from a 5.2% rise in net revenue. Yet comparable store sales were actually down 0.4% for the quarter, showing just how important Container Store's continued expansion has been to its overall growth. Overhead costs rose at a faster pace than revenue, and Container Store cut its guidance for full-year revenue by about $20 million and gave lower predictions of earnings per share than shareholders were looking to see. With comps also predicted to fall again this quarter, the stock plunged 25% in a single day following the announcement.

Since then, Container Store has finally drawn some interest. In late October, a presentation from activist hedge fund Apex Capital highlighted its 4.5% ownership interest in Container Store, with Apex's founder exploring options such as encouraging faster growth, expense reductions, and even considering selling the company in a going-private transaction. With private-equity company Leonard Green & Partners holding a majority stake in Container Store, Apex will have to convince its institutional peer that its suggested plan of action has merit for the company.

Moreover, some investors simply believe that Container Store's stock is cheap enough to be attractive. In November, analysts at Merrill Lynch upgraded the organizational-goods company, highlighting some of Container Store's plans to execute a turnaround of its sluggish sales and drive more customers into its stores.

One long-term concern that investors need to consider is whether potential cost-cutting moves could endanger Container Store's renowned corporate culture. The company prides itself on treating its employees well, with generous salaries of roughly double the average in the retail industry. Many argue that treating its employees well leads to better results for Container Store, but without solid earnings growth, reducing compensation costs would be a tempting way for an institutional investor to push more money down to the bottom line quickly.

In the Container Store earnings report, be sure to watch whether the company further reduces guidance. Although the fiscal quarter doesn't include the whole of holiday season, investors should expect to get a good read on whether Container Store had a successful time in a key season for the retail industry. If Container Store can't deliver an optimistic message this time around, its stock could easily end up headed downward once again.