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Container Store Soars on Positive Comps, Turnaround Hopes

By Dan Caplinger - Apr 25, 2016 at 5:21PM

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The organizational-goods retailer still has work to do but dramatically exceeded expectations.

Image source: Container Store.

Getting organized is hard, and Container Store Group (TCS 2.20%) has tried to tap into a market for helping its customers organize their lives better. However, Container Store has fought an uphill battle, seeing its stock plunge over the past year as the retailer sought to find ways to boost demand for its products and encourage greater loyalty among its customers. Coming into Monday's fiscal fourth-quarter financial report, investors expected to see minimal revenue growth and another decline in profitability. Yet what Container Store delivered was a lot better than investors had thought, and they rewarded the company with a big boost in its stock price. Let's look more closely at the latest from Container Store Group and why shareholders have gotten so excited.

Could Container Store finally have turned itself around?
Container Store's fiscal fourth-quarter results were far from stellar, but they were reasonably solid. Net sales climbed 3.5% to $232.1 million, edging over the $230.5 million consensus forecast among investors. Net income of $9.4 million was down 28% from the year-ago quarter, but after adding back in $0.02 per share attributable to restructuring costs, adjusted earnings of $0.22 per share were a penny better than most investors had anticipated.

Looking more closely at the company's results, Container Store did a good job of doing better than the weak expectations that most investors had for it. By itself, the fact that comparable-store sales were up 0.2% during the quarter wouldn't have seemed all that remarkable, especially because investors were unhappy with similar performance during the fiscal third quarter. Yet Container Store noted that it had given guidance for a drop of 3% to 5% in comps for the quarter, and so managing to finish above the breakeven point was an unqualified win for the retailer. Strength in the company's retail business sent that segment's sales up 4.7%, but the Swedish Elfa International unit saw its sales drop 4.4% in local currency terms.

Still, Container Store has more work to do. Gross margins were up a tenth of a percentage point to 57.9%, but the introduction of free shipping on orders of $75 or more, increased low-margin sales of services, and greater promotional activity weighed on margins. Nevertheless, Container Store said that the boost in sales from making free shipping available has arguably justified the move despite the resulting margin pressure.

CEO Kip Tindell celebrated what he saw as a positive end to the fiscal year for Container Store. "We exceeded our stated expectations," Tindell said, and he saw "improved and positive comparable store sales across non-TCS Closets and non-Elfa areas of the store during the last two months of the fiscal quarter." He believes that the investments that the company has made are starting to pay off, and he looks forward to further gains in the coming fiscal year.

Can Container Store sustain its upward momentum?
Looking ahead, Container Store set some expectations for the 2016 fiscal year. The retailer expects to focus on the custom closet market, both through its TCS Closets segment and with sales of Elfa products. By combining the use of its Contained Home network, online sales, and marketing aimed at maximizing what the company sees as its primary area of expertise, Container Store thinks that it can enhance its customer experience and get better overall results.

Moreover, Container Store expects to offer a customer financing program that will launch during the summer. If successful, the retailer hopes that having the program available will spur greater spending, especially given that average tickets on sales from the TCS Closets segment exceed $10,000.

Container Store did say that it would moderate the pace of its store openings for 2016. Eight stores will open during the fiscal year, including four during the first half. In addition, Container Store is looking at offering a smaller store format next year that could pull in sales in markets that couldn't support a full-sized location.

Looking ahead, Container Store's guidance includes revenue of $830 million to $845 million and comps between down 1.5% and up 0.5%. Net income of $0.20 to $0.30 per share would be stronger than expected, even if top-line results might be weak. One key, though, is that Container Store is counting on no further currency-related weakness in its projections, and any further dollar appreciation could devalue its Elfa results.

Container Store investors were excited about the news, sending the stock up 20% in the first hour of after-market trading following the announcement. If the retailer can build on its momentum, then Container Store stock has a lot further to bounce from its huge drop.

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