With the holiday shopping season already kicking off, it makes a lot of sense for savvy investors to keep an eye on potential investing opportunities while making gift purchases. Retail is full of investing stories this time of year, both good and bad. As I wrote last week, some companies like Best Buy (NYSE:BBY) are playing a dangerous price-matching game to lure customers in a competitive market, while others such as Urban Outfitters' (NASDAQ:URBN) Anthropologie are commanding strong pricing power thanks to distinctive products that have found a niche with strong consumer support. While Urban Outfitters provides an interesting growth thesis for investors, there's a newly public company that provides even more to get excited about: The Container Store (NYSE:TCS).
The Container Store occupies a unique niche that sets it apart from the organizational offerings of larger retailers such as Bed Bath & Beyond (NASDAQ:BBBY) and Amazon.com (NASDAQ:AMZN). While the idea of selling organizing solutions for closet, pantry, drawer, and other household areas may not seem like a market poised for huge growth, The Container Store has developed a concept that provides an unparalleled selection (over 10,000 SKUs) across 16 departments, high quality, and superior customer service.
Growth on multiple fronts
When looking for a retail growth stock, there are several growth drivers to consider regardless of whether the company sells desk organizers or televisions. First, investors must compare the company's existing footprint and projected future footprint. For The Container Store, the company's store count of 62 is significantly less than management's projection that the current concept can grow to 300 stores domestically. The Container Store plans to open seven new locations during fiscal 2014.
Next, it is important to understand the company's track record of generating strong returns from existing stores; this is most frequently measured by same-store sales growth. The Container Store has posted 13 consecutive quarters of same-store sales growth, which demonstrates the strength and longevity of the concept.
In combination, the potential for significant footprint expansion and same-store sales growth points toward a continued acceleration of revenue growth going forward. At the moment, The Container Store has the added advantage of not having a direct competitor. Larger retailers like Bed Bath & Beyond and Amazon.com offer a number of organization options, but the selection, quality, and ability to customize organization "solutions" offered by The Container Store remain unmatched.
Vertical integration provides unique advantages
One of the featured products at every Container Store is the Elfa series of highly customizable shelving units; the Swedish manufacturer makes flexible organization systems for closets, garages, and other applications. While Elfa's products provide remarkable functionality and value to consumers, the important thing for investors to note is that Elfa has been a wholly owned subsidiary of The Container Store for the past 14 years.
The Container Store's ownership of Elfa adds significantly to the company's moat by giving customers the unmatched ability to create and install customized storage solutions that can be designed and installed by the customer or with the assistance of designers and/or professional installers. This level of customizable service is something a larger retailer like Bed Bath & Beyond or Amazon.com cannot provide.
Seven foundation principles
While the culture of a company is often overlooked by investors, it can often say more about its chances of being a winning investment than historical financial data can. With this in mind, The Container Store's seven foundation principles (found on the second page of the company's S-1 filing) are perhaps the biggest reason to consider investing in the company. First on the list is "1 Great Person = 3 Good People -- We hire only great people!" In an interview following the company's IPO, Container Store President and COO Melissa Reiff noted that the company provides 260 hours of training for first-year employees. The result is 10% employee turnover in an industry where the turnover is, according to Reiff, "often over 100%."
An employee-first culture has proven to be a successful model time and again, as illustrated by Top 10 Stock Costco Wholesale. This employee focus translates directly into The Container Store's place on Fortune's list of the "100 Best Companies to Work For" in each of the past 14 years (it made No. 1 twice).
Based on this mentality, it should come as no surprise that the effort to hire, train, and retain great people resonates in the other principles, two of which involve providing the best service to customers and amazing them "with customized solutions -- not just products." Employee-first cultures such as those found at The Container Store, Costco, and other top companies have proven to be an indicator of future success.
Interestingly, Container Store founder and CEO Kip Tindell's letter to shareholders in the Company's Form S-1 filing had a few other parallels with the leadership tone of other great CEOs, including Amazon.com's Jeff Bezos and Whole Foods Market's John Mackey, as illustrated in this wonderfully crafted excerpt of the letter:
...our heart and soul, our devotion to operating a conscious business has never wavered. It's what makes The Container Store matchless -- and something I'm excited to say continues to strengthen with every step we take in our extraordinary journey.
We will continue to innovate, trail blaze, astonish and thrill. And we will continue to work hard and create opportunity for everyone associated with our business.
Risks to acknowledge
It is important to note that an investment in The Container Store comes with risk. The company has not generated positive net income over the past year. As a small-cap company that recently underwent an IPO, investors should expect above-average volatility over the next year. Additionally, the company trades at a lofty price-to-sales valuation, as noted below in the comparison to a broad range of retailers:
|Company||Price-to-Sales Ratio (TTM)|
|The Container Store||2.3|
|Bed Bath & Beyond||1.4|
Of these companies, only Amazon.com has a higher price-to-sales ratio; Amazon.com warrants this premium valuation given its track record for growth, remaining growth opportunity, and growing portion of its business derived from higher-multiple businesses such as cloud computing.
A great opportunity to buy a great company
Even considering the risks for investors, The Container Store's growth opportunity, unique market position, and elite culture make it a compelling long-term investment idea. Given the expected volatility of the stock, consideration should be given to purchasing shares in smaller increments over time. As always, it is important for each investor to judge the opportunities and risks to determine if the stock is a good fit for their personal portfolio.