Q3 2019 Earnings Call
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Good afternoon, everyone and thanks for joining us today, so the container store third quarter fiscal year 2019 earnings results Conference call speaking today, and Melissa rights Chairwoman, and Chief Executive Officer, and Jodi Taylor, Chief financial and administrative officer after more Sun Jody have made their formal remarks, well open the call.
All the questions before we begin I need to remind you that certain comments made during this call regarding our plans strategies uncle and our anticipated financial performance may constitute forward looking statements and are made pursuant to an within the meaning of the safe Harbor provisions at the private Securities Litigation Reform Act like 90.
Such forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results.
Two material to differ materially from such statements. Those important doctors are referred to and that compares towards press release issued today and their annual report on form 10-K filed with the FCC on May Thirtyth 2019.
The forward looking statements made today are as of the date of this call and the container store. It does not undertake any obligation to update the forward looking statements.
Finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call. It reconciliation schedule.
The non gap.
The financial measure to the most directly comparable GAAP measures is also available in the container starts 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.
Thank you Caitlin and thanks to those of you heard joining our call today, let me begin by sharing the highlights of our fiscal Q3 performance and then I'd like to talk about our progress on key strategic initiatives. Jody will then review our financial results in more detail and discuss our outlook.
The third quarter, we reported net sales of 228.7 million and a comp store sales increase up 3%.
Our Elfas third party sales were flat to the prior year in U.S. dollars, but up 6.6% when excluding the impact of foreign currency translation. We also delivered adjusted EPS of five cents compared to seven cents in Q3 last year. Our results include approximately 3 million or four cents per share of net cost.
Our shared with the opening of our second distribution center and incremental custom closet marketing.
Prior to the I see our conference the Jody I attended last month, we released Q3 preliminary results and shared that our comp store sales performance was driven by continued strength in our custom closets business, which represents approximately half of our sales and remains a key strategic priority for us we delivered custom closet sales growth in Q.
Three up 10.2%, which contributed 4.2% to our comp store sales.
Sales of our other product categories decreased 2% contributing a negative 120 basis points to our Q3 comp. This decline was more than entirely driven by our three holiday sales Department, which as a reminder represents less than 4% of our annual sales or close to 13% of our third quarter sales.
As we commented that the I see our conference we had planned for these three holiday departments to be down and we scaled back our investment in inventory and store set up incorporating the learnings from last year.
These three holiday departments were down, 12.2%, which cost us two percentage points to our Q3 comp store sales performance.
We have already made and executed changes for holiday fiscal 2020 based on a fresh perspective from our buying team and I'm really pleased with the assortment that we have already pure rate. It I'm also pleased that our efforts to focus more on our everyday storage and organization solutions. During Q3 proved to be successful and more that off.
Offset the holiday departments selling weakness.
We are proud of our comp store sales growth performance this quarter and I'm also excited for the progress that we have made in growing our online business and the results. We are saying with our recently opened new and relocated stores.
We delivered another quarter, a strong online performance with online only sales up 22.6 ever after several months a prior testing we made the decision to move to $49 free shipping for limited time during the quarter versus our prior threshold of $75. The results from this lower threshold are encouraging.
And we saw strong online sales performance during the quarter.
We will continue to perform testing and currently anticipate that we will run 49 free shipping for certain periods of time during the year as long as we continue to see positive results from our test.
With regards to our stores are brand, new Dallas, Galleria store, which we recently relocated and which is now branded the container store custom closet store similar to our farmers market store in L.A. opened on December 18th to positive initial customer reaction. The store is in a word beautiful and we have and we believe.
By the Fabulous customer experience.
As a name on the front of the building would suggest that this is a custom closets focus store with over 60 closet displays and a strategically edited collection of the other product category offerings to ensure that we provide the complete solution for our customers.
This store brings together all the learnings that we have taken from our farmers market custom closet store as well as the learnings from the changes we made at our Dallas door at Northpark, a couple of years ago.
We believe that these two custom closet branded stores will provide key learnings that we can productively apply to end, even smaller footprint store in the future and we will continue to monitor their performance is closely.
[noise], along with our improvements and focus on new stores and online growth. Let me review our other key strategic priorities with regard to our distribution center and marketing investments.
Our new distribution center at Aberdeen, Maryland is up and running and as I have said before was on time. It on budget by the end of November the news DC began shipping to all plan stores and our direct to customer shipments will continue to ramp up through next month at that time, we expect 50% of direct shipments will come from Aberdeen and 50% from our just.
Abuse and center here in Dallas.
Overall, we expect to ship about 60% of total unit volume for stores and direct to customers out of our Dallas, DC and about 40% out of our Aberdeen DC.
As Jody will share we incurred approximately 2.2 million of net expenses. During Q3 from this new second distribution center and as a reminder, we expect to see considerable savings and improvements in customer delivery faster service for our customers during fiscal 2020.
With regards to marketing as we've been sharing with the launch of our new are there a custom closets line in April an incredible opportunity to gain share in the estimated 6 billion custom closets addressable market, we had been investing and brand marketing to build awareness of our custom closets offerings and capabilities.
Our pop program enrollments continue to grow and we finished Q3 with over 8.3 million pop stars are popstars generate the majority of our sales and those loyal customers shop with us most frequently the extensive customer data. This program provides us is a critical part of our strategic and targeted marketing strategy and a key driver of our increased.
Marketing effectiveness.
We also continue to see great success with our brand ambassadors and Influencers program. For example, we had great fun attracted new customers and Jennifer rated meaningful sales of our shoes storage through our many sneaker head influencers. Additionally, the eight less celebrity organizing teams the home at it is an important exclusive product and social media.
Your partnership that continues to generate lots of social buzz new customers in sales.
During fiscal 2020, we plan to expand our collection of exclusive products at the home at it and also look forward to their Netflix show that we'll be launching this year. We believe this show is sure to build even more awareness around the category of storage and organization and solutions.
We're pleased to maintain our fiscal 2019 outlook that we shared last quarter and we will we will be sharing our detailed fiscal 2020 outlook on our Q4 earnings call in May we're looking very forward to fiscal 2020, as we anticipate harvesting the freight savings from our second distribution center and continuing to capitalize on the large it attracted six.
<unk> addressable market for custom closet with continued focus on this as our number one strategic priority.
And lastly, our fiscal 2019 fourth quarter, an annual Elfa sale are well underway as we shared last quarter in Q4 and January in particular is a period of time, when we experienced strong sales and our other product categories. When Murray condos tightening up Netflix show last last January on January 1st well.
We've seen some pressure in these categories early in the quarter. So far we are well within our expectations and encouraged about Q4 and our full fiscal year.
Jody will now go over financial results and outlook in more detail.
Thank you Melissa and good afternoon, everyone I will now cover our third quarter financial results in more detail consolidated net sales increased 3.2% year over year to 228.7 million by segment sales for the container store retail business increased 3% to 5% to 212 million, reflecting a comp store sales increased 3% as well as sales contribution.
And from new stores, we saw strength across our customer custom closets business, which was up 10.2% well or other product categories. That's most for the Scott were down 2% more than entirely driven by 12.2% decline in our holiday Department sales.
Elfas third party net sales were flat at 16.7 million due to the negative impact of foreign currency translation during the quarter, excluding the impact of foreign currency translation Elfas third party sales were up 6.6% year over year.
From a profitability perspective consolidated gross profit dollars increased 3.3% to 134.4 million consolidated gross margin increased by 10 basis points to 58.8% gross margin at the container store retail business was down 80 basis points, primarily due to successful merchandise and marketing campaigns that drove a higher mix of sort of sales year over year.
This was partially offset by foreign currency tailwind Oh. This gross margin increased 530 basis points from the prior year period, primarily due to lower direct material costs and production efficiencies.
As soon as a percentage enough sales was flat to last year as the leverage we drove with our occupancy in payroll costs offset the incremental custom closets marketing expenses.
Our net interest expense in the third quarter fiscal 2018.
Decreased 14.6% to 5.1 million from 6 million in the prior year period, primarily due to lower interest rate.
Combined with the lower principal balance on our senior secured term loan facility.
Pre opening costs increased to 2.5 million during Q3 fiscal 2019 as compared to approximately 700000 in Q3 last year. The increase is primarily due to 2.2 million of net costs associated with the opening of the second distribution center as well as costs incurred related to the opening of our relocated Dallas Galleria store.
The effective tax rate for the quarter with 43.9% compared to negative 72.8% in the third quarter of last year in the third quarter fiscal 2018, we recorded a 5.9 million dollar tax benefit as a result of the finalization of the onetime transition tax on foreign earnings.
On an adjusted basis, our effective tax rate for Q3 last year with 29.3% the increase in our effective tax rate year over year was due to the jurisdictional mix of income and additional tax deductions related to stock based compensation.
Our net income for the quarter on a GAAP basis was 2.4 million or five cents per share as compared to our GAAP net income of 9.3 million or 19 cents per share in the third quarter last year, which included certain one time tax related items and again on the disposal of real estate. It also excluding those items adjusted net income for third quarter fiscal 2018 was 3.5 mill.
I understand cents per share.
We outlined in our press release, we incurred approximately 2.2 million net pre tax costs related to our new distribution center as well as 800000 in pre tax marketing investments in Q3, which together represent a drag of approximately four cents EPS in the quarter.
Adjusted EBITDA was 22 million in the third quarter the share compared to 21.8 million in Q3 last year.
Turning to our balance sheet, we ended the quarter with 14 million in cash 305.7 million outstanding borrowings and combined availability on revolving credit facilities and cash on hand 64.1 million.
As a reminder, we adopted the new lease accounting standard at the beginning of this fiscal year, which resulted in a growth up of our balance sheet by approximately 350 million.
As expected we ended the quarter with consolidated inventory up 23.69 or 20.3%.
The increase is almost entirely related to inventory held at our new second distribution center as well as inventory due to new product introductions, including the New America composite fine and new Gray to core from Alpha on a per store basis, excluding the inventory associated with our distribution centers inventory levels that are stores were up 2.7% we.
Still expect our inventory inventory position to be more normalized by the end of the fiscal year.
After taking into consideration the Oh.
When our new distribution centers fully operational and taking into consideration inventory ownership of new products not yet owned last year.
Regarding our fiscal 2019 outlook, we're maintaining our established outlook for the year ASML with a share.
We continue to expect fiscal 2019 consolidated sales in comp store sales to be flat to slightly above our previously provided ranges of 915 to 925 million and up 2% to 3% respectively.
We also continue to expect to GAAP and adjusted EPS to be towards the low end of our prior outlook a 41 to 51 cents on a weighted average of 49 million diluted shares outstanding.
We now expect our tax rate for the full fiscal 2019 to be approximately 30% and our annual interest expense using forward LIBOR rate city, approximately 22 million.
In addition, we now expect the estimated impact of our incremental custom closets focused marketing in fiscal 2019 to be approximately 5 million or seven cents per share compared to our original expectations of 6 million or eight cents per share due to the overall efficiency of our marketing spend.
We're also updating our expectations for the timing of realized benefits from direct to consumer shipping savings for the fourth quarter as employee hiring in our second distribution center over the holiday period did not ramp as much as we originally forecasted we now estimate a headwind for fiscal 2019 associated with the net expenses to get the second distribution center up and running.
To be approximately 6 million or nine cents per share compared to our original outlook, a 4 million or six cents per share.
We still expect to be shipping fully out of our second distribution center ask planned by the end of fiscal 2019.
As a result, the combined headwinds in fiscal 2019 related to incremental marketing and the second distribution Center is now approximately 11 million or 16 cents per share. In addition, given the updated expectations, but the timing of realized benefits from direct to consumer shipping savings, we now expect higher freight savings.
In fiscal 2020 from the second distribution center of approximately 8 million or 10 cents per share benefit as compared to fiscal 2019.
Our fiscal 2019 outlook continues to include the impact of all currently announced Terra from China.
And specific to our fourth quarter. There are if you call out one we continue to expect our Q4 comp store sales to be down low single digit as we cycle. The launch of tightening up on Netflix last January which helped to drive an 8.5% comp in Q4 last year.
Two during Q4, we expect to spend approximately 1 million incremental marketing dollars over last year in order to support the launch of the container store custom closets brands marketing effort, including supporting the Nuvera product line.
Three in Q4, we also expect to see approximately 1 million of net expenses related to the second distribution center.
As a result, we currently anticipate EPA has to be up slightly in Q4.
In summary, we continue to be pleased with our operating performance. This year fiscal 2019, it's been a year of important strategic investments that set us up well for the future and we are already beginning to see the benefits of these initiatives take hold we're positioned well to liberty to deliver on our goals for the year and look forward to updating you on our Q4 and focus.
So your 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 Daryl.
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Our first set of questions come a line of Steve Forbes of Guggenheim Securities. Please proceed with your question.
Good afternoon.
Hello, I save.
I wanted to maybe start with the free shipping threshold change right just given given the change and the likely strength in that channel.
Ecommerce channel can you just help us better understand the potential implications to gross margin right, especially within the Tcs segment, and maybe just comment on how that.
Yes that impacted the third quarter performance write down 80 basis points.
Hi, Steve Yeah, where we're continuing to test this more competitive lower stripping threshold of $49 versus the everyday one we've been using a 75 and what we've seen in the tests, so far including the one over the holiday is that our average ticket at all and profitability have remained steady even with the lower threat.
<unk>. So we're pleased with you know the early insights that we've gathered from our testing, but we will continue to test and learn and determine how much and to what level will utilize this as we go forward into 2020.
And then maybe just a follow up on the fourth quarter comp guidance down low single digits right given the disparity of performance custom closets versus others.
Other categories can you just help us understand the potential split right between those two I mean, what is sort of the expectation for custom closets and that sort of steady as she goes.
Similar similar.
Level of growth right in the fourth quarter or what the Elfa sale and so forth or just what are you guys sort of expecting between the two sub categories.
Steve I think last year, it's important to remember that where we saw the most pressuring our comp store sales. During Q4 was in other product categories also recall that custom closets, where it's also does include the closet.
Department, which is up which is part of what I think you could argue with part of the Murray condo effect. So we would expect to see more pressure in those categories that in the core selling of our for custom closet lines, particularly without being the period, where we have our annual also so we can later this month.
Steve also as I said in my remarks, just to reiterate it again, we are we are seeing some pressure in those categories, but they are within our expectations. So we're we're quite encouraged about Q4 and the full year.
Thank you.
Thank you.
Our next questions come from the line of Tammy is a carrier of JP Morgan. Please proceed with your question.
Hi, Thank you so much for taking my question.
So can you talk about the Netflix show by home added a this yet the timing of it and your involvement in the project the product categories, you, except to highlight and that's true and any other details that you can share.
Sure.
Hi, Tami Yeah. This is we're very excited about our exclusive partnership with a with a home at that we currently have 34 exclusive skews and we will be adding to the collection. This year. We're also very excited about their Netflix show, we don't know exactly when it's going to air yet, but it will air sometime this year so.
These are the type of partnerships Tami that we talked about last time that we love then we will be pursuing other opportunities similar.
Got it that's helpful and then separately.
It does seem like you're modeling nine cents drag from the distribution center expenses this year versus six cents previously so what's really driving that and can also be mind. The savings you expect from this next a and 2020 and then the cadence of bad.
Sure Tami high well first of all let me just say that we are very very proud of our teams that executed. This a huge initiative for us to open the second distribution center.
In Aberdeen, Maryland, because it's it's up and running and the cost side of this came in on time and on budget budget. So we're very proud of him and very thankful for the hard work we've done because we certainly know others have stopped their toes on these types of Big project. As you know it's expected that it will give us considerable freight savings as we move forward with this project so.
Just to be more specific as to the cost side that you're talking about for fiscal 19. What happened is during the holiday period, we experienced slower hiring that we had expected which means simply that the benefits associated with the freight savings for the direct to customer shipping portion will be a bit train.
Suffered from fiscal 19 into fiscal 20, so we'll receive less of those benefits in Q4 than we had initially expected, but then more in fiscal 20. So it's purely timing of benefits. The benefits are still expected to be fully realized and like I said the cost side came in well within our expectations at that distribution center in.
Recorded by the end of November we were fully shipping out all of our store replenishment trucks exactly on schedule as planned and we started to ship and had planned always to ship gradually the direct to consumer portion of shipments that we intend to do out of this facility, but they just ramp at a slower rate than we had anticipated due to some.
Hiring challenges that we're now I'm feeling like we're in a position to be caught up with and we still fully expect that we will hit our targets in terms of being 100% operation, where we expect to be in facility at the ended the fiscal year with ultimately about half of our direct to customer orders coming out of the Aberdeen.
Facility in half thought a Dallas, which has some tremendous customer service improvements because we expect to tear literally cut the time. It takes for an order to ship and be received by customer in about half from a cost perspective, you're right. We do anticipate the costs. This year will go from the six from the range.
We've been saying a 4 million up to 6 million. However, next year, we are saying that the benefits. We expect to see receive will go from six to 8 million. So again, it's really just kind of a $2 million transfer between the two fiscal years timing.
And Tammy just one other thing I wanted to share that I've met too about the home at when you're asking about that if you don't mind I think it's important to note that this partnership is a super Great example of customer engagement and it really is allowing us to engage with new and younger customers. So that was you know part of the strategy as well and we've just been really pleased with the results.
Got it thank you so much.
Thank you.
We have reached the end of the question and answer session I will turn the call back over to management for any closing remarks.
Thank you all very much for joining our call today, and Jody and I will look very forward to our next call in May where we will report on Q4 and our full fiscal 19 year. Thanks very much.
This concludes todays conference you may disconnect your lines at this time. Thank you for your participation.