Q2 2019 Earnings Call
Being recorded.
Now my pleasure to introduce your host Ms. Caitlin Churchill Investor Relations. Thank you may begin.
Good afternoon, everyone and thanks for joining us today put the container storage second quarter fiscal year 2019 earnings results Conference call.
Today, or what's the right Chief Executive Officer, and Jodi Taylor, Chief financial and administrative officer. After Melissa Jodi have made a formal remarks, well open the call to questions.
Before we begin I need to remind you that certain comments made during this call regarding our plans strategies and goals and our anticipated financial performance may constitute forward looking statements and are made pursuant to an within the meaning of the safe Harbor provisions. The private Securities Litigation Reform Act of 1995 such for.
Looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements.
Important factors I refer to it looked became the first press release issued today and in our annual report on Form 10-K filed with the FCC on May 13 2019.
The forward looking statements made today are as at the date of this call on the computer store does not undertake any obligation to update forward looking statements.
Finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call a reconciliation schedule Nongaap financial measures to the most directly comparable GAAP measures is also available in the consumer sports press release issued today.
A copy of today's press release may be obtained by visiting the Investor Relations page of the website at Www Dot container store Dot com.
I will now turn the call over to Melissa Melissa.
Thanks, Caitlin and thank you to all for joining our call today I'd like to begin by sharing the highlights of our fiscal Q2 performance and then speak about the progress we're making against our strategic initiatives. Jody will then review our financial results in more detail and discuss our outlook.
Fiscal Q2 was another solid quarter for the container store driven by a comp store sales increase of 5.4% primarily due to strengthen our custom closets business as well as continued growth and our other product category. As you know custom closets represents approximately half of our consolidated sales and with our new.
A very closet product watch this past April we believe we now offer the most comprehensive collection of custom closet available in the marketplace.
Our robust offering includes a full suite a four distinct product line that positions us to capitalize on the estimated 6 billion dollar custom closets market. In addition in order to fully service our customers with a complete solution. We offer an important wide selection of complimentary products for their solution.
There are projects to help them maximizer space and make the most of their home in Q2 are kind of acquired the sales were up 9.3% contributing 4.2 percentage points to our comp store sales, reflecting broad based performance and positive customer reaction to our four offerings. This includes.
I'm going to strengthen our closet department as well as our new a barrel line and a new great color of our Elfa decor product offerings that we launched in June .
Our other part of categories increased 2.2% in Q2 and has had a positive comp store sales contribution of 1.2 percentage points.
This performance reflects the positive impact of our ongoing strategic initiatives, which include the success of a new an exclusive product <unk> watch and buy in collaboration with the celebrity organizers the home at it we're having great fun with them. It's a wonderful partnership that continues to generate social buzz and excitement and we recently added.
More fabulous products to this exclusive collection last month and speaking of the home at it you may have heard that they have begun production on a new Netflix very focused on celebrities everyday clients and their organization projects. We're just thrilled to have an exclusive ambassador relationship with the whole metric that we intend to grow.
In addition to the success of our new product offerings. We also benefited this quarter from improved in stock levels to support strong sales trends and new product launches. We are building inventory at our new distribution center in Aberdeen, Maryland, which I'll talk more about in just a moment.
Our overall overall consolidated sales in Q2 were up 5.3% two to 236.4 million performance at the container store was partially offset by a decline and Elfas third party sales at 2.6% and U.S. dollar due to foreign currency translation, our third party cells that alpha were up four.
<unk>, 0.5% in local currency.
As expected, we did incur a 1.7 million incremental marketing expense this quarter and $1.7 million of expense due to the setup of our second distribution center in Maryland, which was a combined operating margin drag at about 140 basis points and a combined five cents impact to earnings per share.
Second quarter adjusted earnings per share was eight cents versus the 10 cents reported in Q2 last year, what the real with a year over year decline more than entirely driven by the just mentioned investments in our second distribution center and marketing.
Now I'd like to share just an update a quick update on our key strategic priorities, starting with our stores as we discussed on our Q1 call with only 93 stores today and substantial whitespace across the country. We believe there is more than ample runway for new store growth. We plan to start capitalizing on this in fiscal 2020 with <unk>.
Please open up our investment in our second distribution center.
This year fiscal 29, we had planned to store openings, including one restart I'm sorry, one store relocation, we opened or 90 search door in Memphis last month, and a very pleased with the customer response at our early result.
As a reminder, this store is another one of our smaller footprint stores under 20000 gross square feet and reflects the learnings from our many test alert activities, including our Reimagine Dallas flagship store that we continue to use as a laboratory to test and try new experiences for our customers.
Our Dallas Galleria store will relocate and reopened as a container store custom closet store in Q3, and we'll have a format similar to our farmers market, Los Angeles store, which after being closed for five weeks reopened as our first the container store custom closet store this past July .
We are delighted with our redesigned and rebranded farmers market store that had to substantially increase visual presentation of custom closet as well as many other a visual presentations for all areas of the home over 60 display solutions to help our customers with their projects. We look forward to building a pipeline of custom closets.
Of course, while simultaneously generating valuable learnings that we intend to incorporate into our go forward existing and new store growth plans.
Our recently completed renovation of our Reston, Virginia store includes an expanded custom closet section showcasing the all four of our custom closet life Alpha classic up with the core Advair and Alaris and by expanding the custom closets area, we were able to double the amount of plaza displays in the store aren't has to design center.
A presentation allows our customers to better experience. The features benefits style and design of all our custom closets option. We also re imagined our existing shopping department and I reckon store to highlight solution for various areas of the home such as garage at home office and pantry laundry, all supporting our strategic vision I provide.
During our customers with complete organizing solutions for their home.
This renovation was completed at the end of September and provides a scalable template that can't be incorporated across many of our existing stores as we evaluate the customer response.
The successful interplay of our stores that are online channel continue to work well together to drive cross channel sales and custom closet lead.
Our robust online channel increased 18.5% in revenue in Q2, thanks to continuous optimization of our digital marketing spend and a more dedicated attention and focus on online merchandising.
We recently redesigned our online checkout process, making it significantly easier for customers to check out the new design consolidated or multi page checkout process down to a simple to step process and since it has been implemented last month, we have seen growth in sales, particularly from those customers checking out on a mobile device.
[noise]. The success, we are saying with our merchandising initiatives as reflected in our comp store sell performance as I previously shared and in addition to new product introductions across both custom closets and other product category. The merchandising team has been focused or bad exclusivity of products global sourcing to reduce cost and mitigate Tara.
And private label during Q2, we introduce expanded private label products across our kitchen and closet Department. This includes for example, our new everything door organizers and refrigerator best and numerous closet Department program.
We anticipate incremental sales and gross margin opportunities from these private label program as they continue to grow and mature the container store brand. We know has tremendous upside for growth in private label, especially when leveraged with our global sourcing initiative.
We've also seen good success as we added to our collection of grab and go Elfa products, taking learnings from the curated collections, we created online and adding more box sets that make it easier for our time starved customers to purchase new pre packaged products featured include a door and wall rack and a narrow cabinet door organizer that works beautifully and many are.
These are the home, including bathroom vanities.
[noise] our holiday shop merchandise is now available in our stores and online we've worked hard to streamline this product collection, incorporating our data and customer feedback from last year. We've approached this season more conservatively from an inventory ownership standpoint, and it's dead have enhanced plans to drive sales.
Around our core everyday storage and organization solution. For example from October 14th due November 10th we're conducting our first ever kitchen, and pantry holiday sale with the objective to motivate our customers to get organized for the holiday.
I know tariffs continue be top of mind. It so I want to be clear that our outlook for this fiscal year includes the impact of all currently proposed and effective tariffs on Chinese imports.
We believe we're well positioned to manage the higher tariff and are taking the steps that we had previously discussed to mitigate the impact such as sourcing options vendor collaboration and selective price changes.
Fiscal 19 is a year of marketing investment for us and we remain on track to spend the planned approximate 6 million increase in marketing.
This increase is dedicated to the container store custom closets to build awareness of our full suite of custom closets and complimentary products.
We continue to use our brand marketing tagline the container store workspace comes Brian in our marketing messages and continue to use our media mix model to direct spend and maximize return on investment.
Our pilot program enrollments continue to grow and we finished Q2 with over 8 million Popstars.
These customers are most loyal and generate the majority of ourselves and it turned we provide them with special benefits such as early access to our holiday shop collection and early access to the home at it exclusive new products.
And our collaboration with the whole met it goes beyond developing it closely product. This collaboration also extends our brand reach given the very successful digital and social presence presence that the home at ahead. They are an important organization category Influencer.
And our trade program was redesign of relaunched in fiscal 2018, and we continued to see excellent traction with our new updated program, particularly around the container store custom closets, while still small we're pleased to have more than doubled to both the number of trade members in our program as well as a level of sales generated by trade members overall, we enter.
Tend to continue growing our trade program through new partnerships with professional organizers architects interior designers and by promoting our brand with select trade shows and publications.
And finally, we are extremely pleased with the progress of our new second distribution Center, Aberdeen, Maryland, which continues to perform on time and on budget, we began receiving product to the facility in July and this month, we began outbound shipments to stores and direct to customers as we ramp up the volumes shipped out of this facility the stores that are.
Expected to receive shipments from the distribution center are scheduled to do so by the end of November 2019 with shipments direct to customers gradually increasing through March 2020 at that time, we expect half of our direct shipments from the new facility and the other half from our Dallas distribution Center when the new facility in Aberdeen, Maryland is fully operational.
We expect to ship about 60% of store and direct to consumer to customer orders out of our Dallas distribution Center, and 40% out of our Aberdeen distribution center, improving delivery time times to customers and realizing efficiencies efficiencies. We also look forward to generating the estimated 6 million or nine.
Per share improvement and freight savings next fiscal year 2020, when the new facility is fully up and running.
We are updating our fiscal 2019 outlook today to incorporate our actual results for the first half of the year and our current views on the remainder of the year. We now expect our net sales and comparable store sales to be at to slightly above our previously provided ranges of 950 million to 925 million and too.
The 3% respectively.
Additionally, we now expect our GAAP and adjusted EPS to be towards the low end of our previously provided range a 41 to 51 cents.
So in summary, it was a good Q2 during which we continue to deliver traction against all of our key strategic priorities. The work, we have been doing across stores and merchandising marketing technology and infrastructure is having an impact and driving our operational and financial performance importantly, all of this work positions us well.
To capitalize on the many opportunities that lie ahead, and we look forward to updating updating you on our progress.
Okay. So Jody will now go over the financial results and our outlook in more detail.
Thank you Melissa and good afternoon, everyone I will now cover our second quarter <unk> financial results in more detail consolidated net sales increased 5.3% year over year to 236.4 million by segment sales for the container store retail business increased 5.9% to 221.2 million, reflecting a comp store sales.
The 5.4% as well as sales contribution from new stores, we saw strength across our custom called <unk>, which was up 9.3% as well as strong performance from our other product categories, which were up 2.2%.
Elfas third party net sales decreased 2.6% to 15.2 million due to the negative impact of foreign currency translation during the quarter on an SDK basis Elfas third party sales were up 45% year over year.
From a profitability perspective consolidated gross profit dollars increased 4.8% to 136.8 million consolidated gross margin declined 30 basis points to 57.9% primarily due to sales mix at the container store, which included strong selling a products from improved merchandise now campaigns.
Gross margin at the container store retail business was down 80 basis points, primarily due to successful marketing and merchandising campaigns that drove a higher mix of lower margin product and service sales year over year. This was partially offset by foreign currency Tailwinds oldest gross margin increased 110 basis points from the prior year period, primarily due to production efficiencies partially.
That by higher direct material costs attributable to increased raw material costs associated with a weaker Swedish krona.
Asked you named the percentage of net sales increased 110 basis points versus last year, primarily due to incremental custom closets marketing expenses as well as health care and real estate property tax expenses, partially offset by ongoing savings and efficiency efforts.
Our net interest expense in the second quarter fiscal 2019 decreased 26.8% to 5.4 million from 7.4 million in the prior year due to the September 2018 Amendment of our senior secured term loan facility.
Pre opening cost increased to 2.3 million during Q2 fiscal 2019 as compared to 900000 in Q2 last year.
Increase is primarily due to 1.7 million of costs associated with the opening of the second distribution Center, we opened one new store in Q2 of each year.
The effective tax rate for the quarter was 26.8% compared to 30.4% in the second quarter of last year with the decline due to the jurisdictional mix of income and additional tax deductions related to stock compensation.
Our net income for the quarter on a GAAP basis, with 3.6 million or eight cents per share as compared to our GAAP net income of 3.2 million or seven cents per share in the second quarter last year on an adjusted basis, excluding cost associated with closing down off of France operations. In Q2. This year as was the losses on the extinguishing the debt in Q2 last year adjusted net.
Didn't come with 3.9 million or eight cents per share compared to adjusted net income of 4.7 million or 10 cents per share last year.
Adjusted EBITDA was 22.4 million in the second quarter share compared to 24.3 million in Q2 last year.
The decrease in adjusted EBITDA was primarily due to the 1.7 million of incremental marketing investment.
Turning to our balance sheet, we ended the quarter with 9 million in cash 285.8 million, an outstanding borrowings and combined to billability on revolving credit facilities and cash on hand 91.5 million.
I should also note that we adopted the new lease accounting standard at the beginning of this fiscal year, which resulted in a gross up of our balance sheet by approximately 350 million.
As expected we ended the quarter with consolidated inventory up 22.4 million or 20.2% I'm just increased approximately 14.4 million relates to inventory received by the end of Q2 at our second distribution center and the remaining increase is primarily due to new product introduction, including the New America.
From Closets line, and new Great Alpha to cool new grade to core from Alpha.
On a per store basis, excluding the inventory associated from the new distribution center inventory levels at Tcs were up 9.6%.
As we previously shared we expect to carry elevated inventory levels throughout the year. After we receive inventory at our new second distribution center, while continuing to ship to most of our stores out of our Dallas area distribution Center.
As Melissa mentioned, we just began outbound shipments out of the new facility, which will continue to ramp to the ended the fiscal year, we still expect or inventory position to be norm more normalized by the end of the fiscal year, when our new distribution center fully operational after taking into consideration inventory ownership of Elsa and new Oh.
Sarah and new Alpha greater core not yet owned last year.
Regarding our fiscal 2019 outlook, we're updating our established outlook for the year as Melissa shared.
After factoring in our results for the first half of the fiscal year. We now expect fiscal 2019 consolidated sales and comp store sales to be at to slightly above our previously provided ranges of 915 to 925 million and up 2% to 3% respectively.
We now expect GAAP and adjusted EPS to be towards the low end of our prior outlook a 41 to 51 cents on a weighted average a 49 million diluted shares outstanding.
Fiscal 2019, EPS outlook still includes approximately 6 million of incremental custom closets focused marketing or eight cents per share and a 50 basis point headwind as well as an estimated 4 million or six cents per share headwind associated with net expenses to get the second distribution center up and running.
The combined headwind in fiscal 2019 related to incremental marketing and the second distribution center is approximately 10 million or 14 cents per share.
In fiscal 2020, we continue to expect considerable freight savings from the second distribution center, a 6 million or nine cents per share increase in F from fiscal 2019.
We now expect our tax rate for the full fiscal 2019 to be approximately 31% and our annual interest expense using forward LIBOR rates to be approximately 22 million.
As Melissa also share fiscal 2019 outlook does include the impact of all currently announced tariffs from China. I also want to know that retail price changes aren't action, we've used to protect gross profit dollars, but they do have a slightly negative impact on gross margin rate.
Our current thinking around the quarterly comp store sales cadence for the remainder of the here is that we continue to expect to see caught moderation in Q3, as we are still planning the holiday quarter with conservatism and low single digit negative comp store sales. In Q4 is we're also still conservatively thinking about cycling the strong 8.5% comp store sales, we delivered in Q4 last year.
Specific to our third quarter. There are a few call out one we currently expect our Q3 comp store sales to be inline with our fiscal 2019 annual outlook ranges.
Two during Q3, we expect to spend approximately one and a half million incremental marketing dollars over last year in order to support the launch of the containers for custom closets brand marketing efforts, including the introduction of the of their product line.
Three in Q3, we also expect to incur approximately 2 million an expense related to the second distribution center.
For Q3 is expected to utilize a tax rate of approximately 36% for GAAP and adjusted EPS.
Due to tax implications the stock compensation Forfeitures, we now estimate our tax rate for the full fiscal 2019 to be approximately 31%.
And as a result, given the cadence of these investments we currently anticipate S to be down in Q3.
In summary, we are pleased with our Q2 financial performance, we remain focused on disciplined execution of our key strategic priorities to drive sales and profitability, while making strategic investments in our brand building campaigns and new distribution center.
We expect to begin to benefit from our second distribution center investment as early as the fourth quarter when our new facility comes fully online. We look forward to updating you on our progress on our next earnings call.
Thank you now I'd like to turn the call back over to the operators that we can open the lines for questions Michelle. Thank.
Thank you will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question Q. You May proceed start to if you'd like some of your question from the Q for participants using speaker equipment, maybe necessary to pick up your hands that before pressing the star keys. One moment. Please poll for your question.
Our first question comes from the line a Steve Forbes with Guggenheim Securities. Please proceed with your question.
Hi, guys, it's Steve.
Thanks for taking my question.
Sure.
Just wanted to start with your learnings from the farmers store the farmers market share in Los Angeles.
Well as Reston, and maybe any learnings from those.
What's your capital allocation moving forward.
You need expansion versus remote.
You bet.
Well first of all farmers market as I said in my remarks, we we close that store for five weeks and we redesigned it we remodeled led and we reopened did on July twentyth and so far the feedback has been quite a positive I mean this is our very first concept store of the container store custom closet store, a I can say.
But it's it's still obviously quite early but initial results are as we expected the employees are super fired up and we're getting good customer response.
We did expect our century city store also in L.A. to pick up some of the other general merchandise sales because we did rationalize some of the Oh the products out of farmers market. So that we can increase the custom closets footprint, which is over 60 displays.
So we're watching it very very closely I I hope everybody on this call can get out there and see it it is absolutely beautiful and we will be relocating our Dallas Galleria store in Q3 as I said sometime in December and it will also reopened as the container store custom closet store.
And then the in Reston, Virginia, we've taken kind of that a typical prototypical existing store and we have greatly expanded the custom closet presentation and then we redesigned our shelving department, but we're not changing the name of that store. It will still say the container store and it will still have the same kind of primary look and feel as many of.
Our other stores.
So we got a lot of test and learn things happening and we're still learning from our North Park Reimagine store that that we did about what 18 months ago Jody I guess.
So we've got a and we still using that as a laboratory. So we're very excited about this and this will determine our growth strategy going forward with new stores as well as possible future remodels for the existing stores because we have about 70 stores I would say that are pretty typical to arrest and footprint.
Great. Thank you and then maybe shifting gears to there I know, it's still early days, but if you're seeing any cannibalization and allow shopping trends have really shifted within the deposit.
Yeah, you know it's still so early I wish I had more data. It's just still so early to really discern any potential cannibalization. We're all <unk>, obviously monitoring that very closely a very did I definitely contribute to our custom closet sales growth in Q2, and we expect that to continue they're responsible.
Customers has been strong there was Scott response by the media has been strong and so again, we feel like this this was a void in our offering and we feel really good about our suite of custom closet.
Offerings, now and all the finishes and the options that go with it. So we'll keep you posted on that as we continue to support it and marketed and monitor it carefully.
Great. Thank you.
Thank you.
Thank you once again as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone one indicate your line is and the question Q for participants using speaker equipment, maybe necessary to pick up your hands that before pressing the star Keys. Our next question comes from the line of Tammy Zacharia with JP Morgan. Please proceed with your costs.
<unk>.
Hi, My son, Jody Thanks for taking my question.
So my first question My first question as they're on operating margin for the back half.
So are you still expecting full year operating margin to be flat to slightly off given that and now you're expecting he has to be in the lower end of the previous guide.
Hi, Jamie this is Jody and I'll take that and you don't let me step back and just kind of frame what we've seen so far for the first six months as I'm sure you you're looking at that so if you look at the first the year to date period through Q2, we saw a lift and consolidate obviously sales are up significantly as you've seen we saw list lift also can.
<unk> gross profit dollars a those are up 4.6%.
Operating income for this period is down 1.6 million, but that does include six and a half million of combined incremental costs related to the second DC in the <unk> and custom closet brand marketing and of course for Q2 alone. If you look at the reported adjusted EPS at eight cents that also incorporate five cents a those same cost.
Second DC in the marketing I'm, so obviously without those EPS would have been up nicely over last year.
You know what I just think we feel good about the direction. We're going here, we do know that the brand marketing and the second distribution costs are expected to be approximately 10 million as we said, which will drag this years earnings, but we feel very good that those well indicates that the second distribution center, we quantified the dramatic improvement.
Spec next year because of the freight savings associated with that and then also as it relates to the marketing obviously, we didn't.
A custom closets is a longer purchase cycle. So when doing such marketing, we don't expect that to have an immediate payback. We think that's something that really helps us to capitalize on that estimated 6 billion dollar opportunity that is out there and we know we still are a small player that's a part of.
So hopefully that answered your question.
It does thank you so much that's helpful. And then my second question as you mentioned, a selective price increases to accommodate a comedy <unk> terrorists. So can you comment on what you've seen a in terms of customized.
Responding to that or are the purchasing lower volume, but being a that's being offset by the price increase and where the price increases across the portfolio or only on a time impacted items.
Oh, good question, Hanmi and I'll take that its.
Just let me, let me sort of set the stage as a reminder, I'm first of all we're confident that the tariffs that we've seen flowing through our p. and all that our actions we've taken that they are mitigating those costs. So.
We don't believe that our results are being negative impacted negatively impacted by the actions that we've taken and prices just one of the many actions that we've taken.
Just to give it a little bit more color. We have a total of approximately 2100 skews that have been tariff impact and out of our assortment, which is around 10000 skews and if you look back at the right now we have we're paying parents directly on about 17% of our purchase.
Yes.
Where we've taken price is only on about 470 skewed and you know we did this very granularly utilizing all of the great work that we had already been doing on our pricing projects. So we're very fortunate that we were already very deep with having a lot of learnings and systems and knowledge and both.
I guess a round out so we can use our analytics to help inform the decisions. It's been not a one size fits all approach being done very very literally down to the SKU level and but we have conservatively tami assumed that we would see volume declines with the goal to mitigate gross profit dollar impact where we did take price. So I just at a high level.
I would say, we're very pleased with the approach we take into this and do you feel like it's it's worked well.
Thank you that's actually great color. Thank you so much I have a quick follow up on that so Ah you mentioned, you're currently paying type of some 17% of purchases I can you comment how much it goes up or would they impending December 15 terrorists.
You know I prefer not to be specific on the dollars with that but I can assure you that we already are thinking carefully through that and we'll make sure that the same actions that we've been considering will be utilized so that again, we've we thought of that as we're giving our outlook. So that there's not further risk to our numbers based off of I.
And that will happen.
Thank you that's super helpful. Thank you.
Well thanks Tammy.
Thank you there no further questions at this time I'd like to turn the call back over to management for any closing remarks.
Thank you Michelle and thanks again to all joining the call. We appreciate your support and interest and we'll look forward to talking to you. When we report Q3 things might have a good day.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation have a wonderful day.