Is It Time To Give Up On The Container Store?

TCS Closets is The Container Store's new luxury line of custom-built closets. Source: The Container Store.

It's been just over a year since The Container Store (TCS +0.00%) went public in November 2013, and it hasn't been pretty. The IPO priced at $18 per share, but by the end of the first trading day they'd be worth twice that, closing at over $36. It wasn't long before The Container Store became an official Stock Advisor recommendation, followed by a ­re-recommendation just two months later.

Yet, as 2015 kicks off, shares are almost right back to that $18 IPO price; shares lost nearly 60% of their value in 2014. Needless to say, that's dramatic underperformance compared to the broader market. I personally bought shares shortly after the IPO in November 2013, and again in June 2014. Color me underwhelmed with its performance in my portfolio.

Fellow Fool Anand Chokkavelu, CFA, put together a comprehensive buy thesis, one that mostly echoes my own reasons for buying in. The Container Store dominates a premium specialized niche, one that competitors don't focus on as heavily, and it's much more profitable than its peers in terms of its operating margin. At the same time, The Container Store's retail footprint is very small, suggesting many years of potential growth as it expands geographically.

But here's the real question at this point: is the market just underappreciating a hidden gem, or have the company's fundamentals really deteriorated that much? Is it time to give up on the storage specialist?

The bad
The Container Store's earnings releases over the past year or so have gotten progressively worse. Last week, The Container Store reported revenue of $190.9 million alongside adjusted net income of $0.07 per share. The top line was shy of Street expectations, but the bottom line was on target.

Company comparable store sales were down 3.5%, which was at the low end of the company's guidance. The Container Store had predicted this figure to be flat or in the negative low single digits. Worse yet, The Container Store cut its full-year outlook again for the second consecutive quarter.

Source: SEC filings.

On the call, CEO Kip Tindell conceded that management wasn't happy with comparable-store sales, and that the company is working "vigorously" to improve this figure. Tindell attributed the poor comps to low traffic, which was also affected by poor weather conditions. The silver linings were stable gross margins and a modest 2% increase in the average ticket.

The good
Recent woes aside, The Container Store still has a growth trajectory ahead of it. Top line growth may not be all that impressive right now (just 1.4% last quarter), but that should improve as The Container Store marches steadily toward its goal of 300 stores. The company ended last quarter with 69 stores and 1.73 million gross square footage. Those stores are located in 25 states and the District of Columbia, so the geographical expansion storyline within the U.S. is still young.

While The Container Store has a relatively high debt load given its modest size and cash position (over $350 million in long-term debt, contributing to a debt-to-equity ratio of over 3), the company is working to both pay down this balance while also lowering its interest expense.

The Container Store refinanced its term loan facility in November, translating into lower interest rates. Interest expense was down 26% from a year ago, totaling $4.3 million last quarter. Seeing as how interest expense gobbles up over 30% of operating income before reaching the bottom line, reducing this cost leaves more for shareholders.

The new
Management has also recently embarked upon a three-pronged strategy to boost traffic and average tickets: Perfectly Organized Perks, Contained Home, and TCS Closets.

Perfectly Organized Perks, or POP!, is a customer loyalty program that was launched in July 2014. It's a pretty standard loyalty program, offering discounts and points to regular shoppers; the most surprising thing is that it took the company this long to introduce a loyalty program. Customer enrollments are already over 1.5 million, and The Container Store estimates that half of sales are coming from these members.

Contained Home brings a consultant to a customer's home to put together a customized organization plan. Consultations cost $50, but obviously the total bill will end up much higher if all goes according to plan and the customer buys all the necessary products to implement it.

TCS Closets is a high-end, custom built-in closet offering. Following a pilot launch in Texas late last year, this offering will rollout to all other stores throughout this year. The average ticket for these luxury closets is over $2,000.

All three of these strategies have significant potential to strengthen The Container Store's business and its relationships with its customers.

The verdict
Without a doubt, it's been a rough (but short) journey as a shareholder of The Container Store. The company's financial performance over the last year has left a little to be desired, but the long-term storyline doesn't appear to have fallen apart. For the time being, I'll be holding on to my position, but keeping an eye on these new growth initiatives.

But if comparable store sales and other pertinent metrics continue to deteriorate, then I might have to pack up and move on.