Investors in Container Store Group (NYSE:TCS) have endured tough times for a long time, as the once-hot organizational-products retailer's IPO about a year and a half ago created high expectations that the company has failed to match. Coming into Monday afternoon's fiscal-fourth-quarter financial report, Container Store investors hoped the company would deliver some signs that the retailer might finally have started to accelerate revenue and profit growth. Instead, Container Store's results indicated the company is still struggling to find the best path toward success, and shareholders were hit with another big decline in after-hours trading following the announcement. Let's look more closely at Container Store Group's fourth-quarter results and whether the negative investor response is justified.
Container Store can't get itself organized
Container Store Group certainly didn't inspire confidence with its major results. Sales of $224.3 million were up just 3.4% from the year-ago quarter and almost $10 million lower than the consensus estimate among those following the stock. Similarly, adjusted net income of $0.24 per share was up slightly from last year's figures but still well short of the $0.31 per share investors had hoped to see.
As it did in the prior quarter, Container Store relied entirely on new store openings to drive its slow revenue growth, as sales at existing stores failed to sustain last year's levels. Comparable-store sales dropped 0.8% for the fourth quarter, closing a fiscal year in which comps dropped 1.4%.
Container Store trends were mixed in a number of key areas. Gross margin dropped again from the year-ago quarter, with a shift in purchasing behavior for the company's Elfa products putting downward pressure on its margin figures. On the positive side, overhead expenses climbed at a slower pace than revenue, with a drop of almost a full percentage point in the overhead-to-sales ratio stemming largely from reduced marketing costs. A drop in interest expense also bolstered Container Store's bottom line. In addition, a big jump in provisions for taxes weighed on net income.
CEO Kip Tindell was generally dissatisfied with the quarter's performance, noting in a press release that "our fourth quarter did not conclude according to early in-the-quarter trends" that he had identified in the company's third-quarter financial report. Tindell pointed to bad weather at the end of the key annual Elfa sale but pledged that "we can and will do better" in the future.
Is Container Store just a mess?
Tindell still has high hopes for Container Store, pointing to the potential success of the retailer's three major initiatives. Rollouts of the TCS Closets collection continued early this year, and the Contained Home in-house design and organization service should add a dozen stores in each of the first two quarters of the new fiscal year. Moreover, the Perfectly Organized Perks loyalty program continues to draw customers and drive growth, and Container Store expects further technological advances to make that offering even more important this year.
Still, Container Store's guidance was received quite poorly. The company expects fiscal 2015 sales of $800 million to $815 million, or growth of about 2% to 4%, with comps expected to come in flat to down 2%. Anticipated net income of $0.30 to $0.38 per share also compares unfavorably with fiscal 2014's adjusted earnings of $0.34 per share. With most investors expecting more than $870 million in revenue producing earnings of as much as $0.56 per share, it's easy to understand longtime shareholders' disappointment with the results.
The response in Container Store Group shares was fast and furious, with the stock plunging almost 25% in the first 30 minutes of after-hours trading following the announcement. Until the retailer gives investors a more positive outlook on its turnaround efforts, it will be hard for Container Store to convince shareholders that the worst is truly over, and that is likely a necessary component for a sizable bounce in the stock price.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends The Container Store Group. The Motley Fool owns shares of The Container Store Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.