Q1 2020 Container Store Group Inc Earnings Call

Greetings and welcome to containers for first quarter 2020 earnings call.

At this time all participants on in listen only mode.

A question answer session will follow the formal presentation.

If we want to require operator systems. During the conference. Please press Star then when your telephone keypad.

As a reminder, this topic were recorded I would now it depends a comfortable with the whole Caitlin Churchill other investor relations. Thank you you may begin.

Good afternoon, everyone and thanks for joining us today for the container store first quarter fiscal year 2020 earnings results Conference call.

Thanks, Dave or what's the right chairwoman and Chief Executive Officer, and Jodi Taylor, Chief financial and administrative officer.

After more Sutton Jody have made their formal remarks, well open the call into question.

Before we begin I need to remind you that certain comments made during this call regarding our plans strategies expectations regarding liquidity goals are anticipated financial performance and our plants in response to cope with my team and the potential impact of it makes you had on our business may constitute forward looking statements and are made pursuant to and within the meeting.

Safe Harbor provisions of the private Securities Litigation Reform Act of two day Scott.

Such forward looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from such statements.

It was important factors are referred to in the container storage press release issued today and in our annual report on form 10-K filed with the FCC I choose 20 to 2020.

The forward looking statements made today are as of today this call and the computer store 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 reconciliation schedule. The non-GAAP financial measure the most directly comparable GAAP measures. Its also available in the catastrophe press release issued today.

A copy of today's press release may be obtained by visiting the Investor Relations page on the website at Www Dot computer store Dot com.

I'll turn call over to Melissa Melissa.

Thank you Caitlin and welcome everyone. We appreciate you joining our call today.

I first want to discuss the highlights of our fiscal Q1 performance that includes of course, the impact of the Carbonite pay pandemic I will also give you an update on our strategic priorities after which Jody will review our financial results in more detail and then we'll open up the call for questions.

There's certainly continues to be a challenging time due to the pandemic. However, I'm very proud of our company and extend my deepest gratitude to every individual our teams for their ability to adapt our jobs and work smarter than ever before.

Is this ability along with our agility positive attitude and execution during this challenging and rapidly changing environment that continues to drive us forward again, my sincere thanks to our organization.

Our fiscal first quarter, which is comprised of April may and June includes the material disruptive impact the carbonite paying pandemic has had on our business. However, our results also demonstrate the resiliency of our business model and our team.

For the quarter, despite a significant loss in store operating days from our temporary store closures and the shift of select locations to curbside pickup we were able to maintain over 72% of our consolidated net sales in generated in the corresponding time period last year.

This performance was the result of the strong growth of our ecommerce business at almost tripled versus last year generating close to 195% sales growth year over year also as a reminder, and Q1, we were cycling a strong 7.8% comp store sales increased from last year.

That increase was driven by strong custom closet, selling as well as residual benefit spend the January 29, P. launch of Murray condos tightening up show on Netflix that helped to drive growth in other product categories too.

As we cycle. These strong period the so in Q1 in this year and our stores have reopened we've seen our sales trends improve.

Fiscal 2020 Q2 to date the month of July only when you look at retail sales orders taken at the container store, we have been able to preserve approximately 90% of our retail sales generated during the same timeframe last year.

Pandemic related disruption both from a store closure perspective, as well as higher than normal low levels of orders triggered by the surge at our online business, where significant headwinds to overall tcs sales growth and profitability in Q1, we did however, improve our level of unfulfilled online sales.

From approximately 11 million at the end of Q4 fiscal 2019 to approximately 5 million at the end of Q1 fiscal 2020. We were also pleased to see sequential sales improvement each month as well as strong customer reception to our planned promotional activities, including our success.

Kitchen, and pantry and closet essential event.

As I discussed in May we made the decision to change the composition and cadence of our campaign early in the first order.

First quarter to adapt to the changing landscape and these changes long with the increase the mix of online sales had a material impact on a gross margin performance with our online mix being by far the biggest driver of our year over year gross margin decline.

Jody will discuss in more detail, we believe that as conditions normalize traffic trends become more consistent and the online sales mix moderate we expect gross margin pressure to begin to east from these Q1 levels. This is of course, assuming we don't have to drastically limits store operations again, and the mix of online sales did not reach.

Turning to Q1 levels.

Additionally, within the container store retail breast business from a category perspective, we saw outperformance from custom closets in Q1.

Largely driven by sales and do it yourself Elfa, we certainly experienced customers very interested in buying alpha during this pandemic and they focus even more on getting their homes organized accomplishing those projects that perhaps they had not been able to accomplish prior to carbonite team.

And in many cases customers opted to buy elfa install it themselves rather than having this dollar come into their home.

Our expansion of Elfa products into more grab and go pre tax solutions also provide also proved to be very successful both online and also in store during Q1.

I'm very proud of how Elfa, Sweden has managed through this crisis well they saw the client and third party sale to do the impact to cope with 19 had on their customers. They executed swift decisions to reduce cost and were able to deliver profitable growth year over year in Q1, despite their sales decline.

As we also shared in May we had to make incredibly difficult decisions with regard to cost actions in light of our temporary store closures.

We're very grateful to our teams and also to our vendor and landlord partners, who really lean did that help us preserve our financial health financial health and liquidity during the liquidity. During these challenging times. It is due to this and many other effort that we were able to deliver positive adjusted EBITDA for Q1, and a significant improved.

Net and year over year free cash flow, despite the sales and margin headwinds we faced.

Stores have reopened we continue to ramp back up our store operations at associated operating cost with employees returning from furlough to be a bit more specific on our current store operations with exception of our downtown San Francisco store.

All stores are now operating with doors open to the public with a maximum of about 50 customers in the store at a time, our San Francisco store continues to provide only curbside pickup and by appointment shopping at this time, we continue to operate with all health and safety protocols in place, including requesting that all customers where.

Mask and providing one if they don't have one which is in line with local government mandates in the majority of our markets.

Prior to July six we had shortened our store hours. However, we have now expanded our hours and on July 13th We also returned to accepting cash and checks.

We resumed taking returns in our stores in early June and are continuing to follow the strict sanitation sanitization protocols around that retired merchandise.

We remain very disciplined managing cost to sales trends and we'll continue to focus on operating with a nimble and leaner organization.

As for form it stabilizes, we also intend to return to more normalized compensation levels across the organization. Since we did institute temporary pay cuts that impact or another of our employees.

Even as we tightly manage expenses to sales trends and this uncertain environment. We're optimistic about the many opportunities ahead bar, Brad and our prudently moving forward with the execution of our strategic initiatives in fiscal 2020 and beyond.

With regard to merchandising, we continue to infuse newness into our product assortment within our Elfa closet line, we launched new products with the graph I finish in March and been very pleased with the initial results. We also have continued to generate great social buzz and excitement with our exclusive product offering in collaboration with the home at it this collection.

It has now grown to include 52 products with our most recent addition, other refrigerator and freezer collection that we launched in May.

The home at it Netflix show is expected to air later in 2020, and we could not be more thrilled with our plans for this partnership and the growth we continue to experience.

We've been working on another exciting collaboration as well that we plan to announced later this year.

As it relates to our stores, we continue to operate with the health and safety of our employees and customers top of mind, why we pulled back on all discretionary spend and limited cap ex but the here we still plan to open one store in late fiscal 2020.

We also expect to continue to test new layouts and sizes of stores. The timing of those of course is somewhat dependent on the ever changing environment.

As we as as seen with our recent the compares to our custom closet store concepts and our Dallas Galleria store and our farmers market store in L.A., our new concepts have a much greater presentation of custom closet with relevant completion products for projects in all areas of the home, including lifestyle displays a product.

<unk> area of the home.

With the estimated 6 billion market opportunity for custom closets, we expect to continue to aggressively pursue custom closets initiatives to gain market share.

For example, our virtual design program that we launched in mid May continues to be well receipt building momentum with a strong average ticket we plan to expand the virtual capabilities to all stores updating the custom closets design a role to include selling in store in home and virtually and getting customers a single pay.

A contact across all channels.

We've also made changes to our marketing campaigns to ensure the relevancy and effectiveness in light of the current environment as I mentioned in fiscal Q1, we ran at extended kitchen, a pantry event as well as her closet essential campaign and instead of repeating our Elfa free installation program from last year. This spring, we offer customers up to 30% off.

They're elfa purchases in order to provide more flexibility for them during carbonite team.

Overall, we were encouraged with the customer response to our Q1 marketing campaigns campaign and combined with our growing Popstar enrollment. We are pleased with our ongoing efforts to increase our brand awareness at the end of Q. What do we had almost 8.9 billion pop stars enrolled considering that we had many temporary store closings during.

Q1, due to the pandemic and pivoted largely to website generate sales, it's quite remarkable to see that we added close to the same amount of pop stars. During Q1 that we did in the most recent quarters prior to the pandemic.

Finally, as it relate to supply chain, we were very excited to have our second distribution center up and running for the entire first quarter to help our order fulfillment needs that we experienced in the pandemic driven surge in online growth.

Both of our distribution centers Dallas in Aberdeen, Maryland did a phenomenal job of quickly increasing their output for online customer orders in Q1.

And while we have had to contend with elevated operating costs at our DC is given the pandemic as well as prudent management of inventory given this backdrop, we're pleased with the improvement in unfulfilled orders, we were able to drive into one.

However, we have had some delays associated with these unfulfilled orders as you've had to manage the impact of the pandemic on our D.C. operations as well as we approach inventory purchases in the temporary closed store environment with conservatism. Our teams are working diligently to get caught up and fulfill these orders and as I've now we.

You're back to shipping orders taken online within 48 hours of receipt for all his talk in stock inventory.

In summary wall incredibly challenging time to operate in retail I'm very pleased with how we have navigated through this crisis, we stay nimble and flexible and disciplined all making sure that our employees and customers are safe and we will continue to operate with the same focus going forward.

As we have reopen stores, we are encouraged with the results. We are experiencing looking ahead, while we are optimistic that sales and margin performance will improve as physical 20, Twond progressive we remain disciplined and agile in managing our business and it's still uncertain environment.

I would like to acknowledge the announcement in our release today that our Chief Accounting Officer, Jeff Miller will be succeeding Jodi Taylor as our Chief financial <unk> Financial Officer as of August 1st 2020.

Jody will continue to serve as our chief administrative officer, and Secretary and will ensure a seamless transition as Jeff said in his new role.

I want to thank Jody for her continued partnership and for everything she has done for the company as CFO over the past 13 years, including her pivotal role in our IPO process in 2013, and the build out of our public company functions and financial processes.

More recently all of the efficiency and optimum optimization work, we've done as well as of the bell that an execution of the initiatives to revitalize sales and profitability that we have done could not have taken place without jodys tireless effort.

She's been a trusted partner and a dear friend to me personally and I along with the board I'm pleased to be able to announced a smooth CFO transition, while we continue to benefit from Jody participation and contributions in her capacity as chief administrative officer.

Jodi has created a strong bench within our financial organization and I had the most confidence and Jeff assuming this role Jeff has been with the container store for seven years, serving as our Chief Accounting Officer. He has worked closely with both Jody me over the past seven years and I'm thrilled to announce his appointment as Chief Financial Officer Congratulations.

Jeff.

And before I turn the call over to Jody I just want to once again, thank our teams for their hard work and dedication to the container store. We've always been a purpose driven employee first culturally latent business and we see that as more important than ever today.

We believe the companies that are best positioned to succeed are the ones that committed to growing sustainably and the ones that align their mission and business strategy with solutions that benefit people and their communities.

And with that my Weve establish an ongoing diversity and inclusion taskforce and I'm very pleased with his team and the progress. They have made and we will soon announce our specific plans for this initiative, both internally and externally as we if we are eager to execute them.

Now I'll hand, it over to Jody to go through our financial results and outlook in more detail.

Thank you Melissa and good afternoon, everyone before I begin I want to congratulate Jeff on his new role one of the key attributes of our company that I'm. Most proud of is the caliber of our people in our accounting and finance team, but I've been privileged to lead the lactate 13 years I'm confident this transition will be smooth and seamless won and look forward to ensure.

With that in the coming weeks before Jeff formally takes the CFO range on August 31st I also look forward to my continued close work with Jeff Melissa and our leadership team in my role as Chief administrative officer and Secretary.

Now turning to our results our first quarter performance with materially impacted by the Cobot 19 pandemic, but it's Melissa mentioned, we're incredibly proud to be adaptability and dedication exhibited by our teams as we navigate through this crisis.

Given the stores were temporarily closed or working with limited operations. During the majority of the quarter. We will focus our commentary on total sales and will not be reporting comparable store sales for this period.

For the first quarter consolidated net sales decreased 27.6% year over year to 151.7 million as you will recall when our May 12 remarks, we noted that for fiscal Q1 to date at that time, we have maintained approximately 76% of the total retail sales orders generated in the corresponding time period last.

Last year, we are pleased they were able to maintain a similar level of performance, but the entire quarter. Despite having to cycle strong custom closet sales from last year. During the second half of fiscal Q1, and despite a lots of a significant number of store operating days.

When you look at our brick and mortar store operating days during Q1. This year, we lost about 20% of our operating days due to complete closures.

Around another 20% of days, we were open but this was only in part of June and was shorter hours limiting customers to a maximum of 50 and also including curbside pickup.

The remaining 60% of our store operating days in Q1, we're in a modified operating model, where we offered only curbside pickup and appointment only business for very few customers at a time.

Our online channel continued its strong performance delivering sales growth of 192.3% nearly triple last year's first quarter results.

On line sales represented approximately 47% of our Tcs Q1, net sales and when you include curbside pickup our website generated sales in Q1 represent a total of 67.5% of Tcs net sales compared to only 16.3% in Q1 last year.

By segment sales for the container store retail business were hundred 39.4 million compared to 195.1 million last year, improving sequentially each month as the corner progressed, our custom closets business performed slightly better than company average declining 22.7% versus last year, while other product categories fell 33 and a half.

Percent [noise].

As Melissa mentioned, we saw strong interest in our Elfa products and solutions, including more sales of DIY solutions as well as strength in our grab and go pre packed solutions, which sold very well online.

We also altered our promotional cadence to for custom closets with the onset of the pandemic to make our offers more appealing to customers wanting to use our great up a solution to get organized while spending more time in their homes.

Within our other products categories, we saw strength in our core categories like kitchen office and storage those products customers were using to organize areas of their home lot quarantining.

Our impulse categories, we're not surprisingly the weakest, including products and the travel tower and get packaging departments.

At Elsa their third party net sales decreased 14.6% to 12.3 million excluding the impact of foreign currency translation also third party sales declined 12.5% year over year due to the impact of coping 19 in Europe.

From a profitability perspective, our consolidated gross margin for Q1 was 51.6% compared to 57.2% last year.

Segment gross margin at the container store was down 760 basis points, driven primarily by increased shipping costs associated with a higher mix of online sales and to a lesser extent increased promotional activity as we worked to drive digital sales with a large number of stores temporary close temporarily closed and store operations signal.

Secondly, disrupted during the period as mentioned Q1 online sales represented approximately 47% of sales at the container store compared to approximately 12% during Q1 last year.

Even our stores are now reopened and as our online mix begins to normalize we would expect gross margin pressure to abate in the levels. We saw in Q1 Tcf. So long as stores remain open and online mixed doesn't return to the levels. We saw in Q1.

Oh for gross margin increased 640 basis points, primarily due to favorable customer and product sales mix and to a lesser extent direct lower direct material cost.

Consolidated <unk> dollars declined 20.9% to 86.3 million compared to 109 million in Q1 of last year driven by the meaningful cost reduction actions. We took in response to cobot 19 impact on our business during the quarter.

As a percentage of sales actually increased by 490 basis points versus last year, primarily driven by deleverage of occupancy and other fixed cost on the sales decline, partially offset by reductions in payroll transportation and marketing call.

It is important to know been in a normal environment. The operating profit impact of a higher online sales next is typically accretive given the higher average ticket and lower than store fulfillment costs that more than offset the lower gross margin of an online transaction. However in Q1, the challenges of Carbonite team.

And the associated disruption led to supply chain and inefficiencies, including higher labor costs that weighed on profitability.

Other expenses increased 800000 in the first quarter fiscal 2020 due to severance costs associated with the reduction workforce as a result of the cobot 19 pandemic and the related temporary store closures.

Our net interest expense in the first quarter fiscal 2020 decreased 13.3% to 4.9 million from 5.7 million in the prior year.

Due to lower interest rates combined with the lower principal balance on our senior secured term loan facility and partially offset by higher balance on our revolver.

The effective tax rate for the quarter was 29.3% compared to 30.5 person in the first quarter of last year. The change in the effective tax rate was primarily due to stock compensation expense and the jurisdictional mix of income.

Our net worth our net loss for the quarter on a GAAP basis was 16.7 million or 34 cents per share as compared to a GAAP net loss of 4.1 million or eight cents per share in the first quarter of last year.

On an adjusted basis, excluding certain cobot 19 related and severance costs incurred adjusted net loss per share was 15, and a half million or 32 cents per share as compared to last years, adjusted net income of 4.1 million or eight cents per share.

Adjusted EBITDA was formed a half million in first quarter. This year compared to 10.6 million in Q1 last year, we were pleased with our ability to deliver pot positive adjusted EBITDA results for the period. Despite the headwinds we faced this reflects our efforts to manage costs, including cash lease payment deferrals to preserve our financial health and liquid.

Study in a highly uncertain period, while we recognize all rent expenses, we normally what on our income statement approximately 12 million a certain cash lease payments have been deferred from our first quarter fiscal 2020, the benefit of which is reflected in our first quarter fiscal 2020 adjusted EBITDA.

Less than half of these lease announced are expected to be repaid in the second half of fiscal 2020, and the remaining amounts are expected to be repaid primarily in fiscal 2021.

We're very appreciative of the ongoing collaboration of our landlord partners. During this time.

Turning to the balance sheet. We ended the quarter was 63 and a half million in cash 308.7 million, an outstanding borrowings and total liquidity, including availability on our revolving credit facilities of approximately 106.9 million.

We ended the quarter with consolidated inventory down 9.4% and we have continued to tightly manage our working capital. We are very weird. We're very pleased that despite the challenging backdrop, we generated positive free cash flow in Q1 and improved liquidity.

Reflecting the impact of all the Swift actions, we've outlined we expect to deliver positive free cash flow for the year.

We also continue to expect our total capex for fiscal 2020 to be in the range of 12 to 15 million.

Well, we're not providing further financial guidance at this time, we did want to provide you with an update on our operations quarter to date about four weeks ended the second quarter fiscal 2020.

As of today all of our stores are open and operating with limited customers inside with only our downtown San Francisco store operating with appointments and curbside pickup only.

As Melissa shared for Q2 to date when you book at our retail sales and take into consideration customer orders taken and not yet delivered to a customer we're maintaining approximately 90% of the total retail sell generated for the corresponding time period last year.

I'm a liquidity perspective, we continue to feel good about our position and as of today liquidity is relatively unchanged from the end of Q1. This reflects a revolving ABL revolver balance of 18 million down from the 78 million at fiscal 2019 at yearend as we paid down 20 million on our revolver borrowings in Q1.

On another 40 million earlier in fiscal Q2.

That concludes our prepared remarks, I'll now turn the call over to Latania to open up the lines for questions.

Thank you.

At this time, we will conduct a question answer session. If you like to ask the question. Please press star one on your telephone keypad.

Confirmation tone indicate your lines in the question to you might start to see wed like to remove your question from the Q.

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First question comes from Steven Forbes with Guggenheim Securities. Please proceed with your question.

Good evening, So I would Hyde Park with.

Hi, everyone I wanted to start with T cells Retrenching comments right, so you're talking about demand orders.

90% retention rate.

In July but can you give us some color on how that retention rate evolved during the course of the month.

Maybe talk about when you think inventory levels would be.

I'm sure normalized free to capture all of that demand and if there's any specific call outs between customer closet trend versus other product categories.

During the month of July.

Hi, Steve how are you.

Let me, let me take that them unless I'm sure you're going to out a few points here, but first off as as it relates to the fiscal July call out Flash. We did have 90% retention I think it's important to remember that last year in Q2, our comps were up 5.4% and actually July was the strongest month.

Of Q2, so we were up against an eight three in Q2 or in in fiscal July. So you know, we're not up against a low benchmark in July so I wanted to make sure that was known.

And in terms of any specific call outs, we have seen really across the store again same comments is what you heard of say in our remarks in terms of Alpha continues to sell well and then also we're seeing strength across our core storage an organization prob products won the most of our customer favorite store and that sort of.

Highlights key storage organization departments across the business customer favorite sale when get it'll have that right. Yeah. The key core storage an organization to the obvious ones the kitchen of the closet the office storage.

Can you continue to perform well.

Thank you then as a follow up right. So you talked about the runs referrals make it was less than half will you just talked about remainder in 2021.

Well I guess, how does that impact.

You know here or in cash flow rate for the back health.

Or where there's just a second quarter impact.

As we think about the qaswarah.

Yeah, Steve we did differ about 12 million in rent payments in Q1, and each case is different but approximately 5 million not that 12 will be repaid well from a cash flow perspective come out in the second half of the fiscal year.

More heavily weighted to Q4, which of course is when we generate a lot of our cash and then that remaining amount of approximately 7 million will go into fiscal 2021 or beyond but is more heavily weighted to the first half of fiscal 2021. So from a p. an l. perspective, there's no impact because we've taken the full hit.

Brent regardless of whether paid in cash or not on the piano from an EBITDA perspective, it will cost them shifts if those amounts and also for cash flow like you said, However, you know with our reductions we've done to Capex and the way we're managing the cost in the business.

We still feel very good about where we sit from a liquidity perspective from a cash flow perspective, and you heard me say, we still expect to be able to generate free cash flow as we proceed through the fiscal year.

And then one last quick one on the reduction in payroll.

Maybe just give me an update im sorry, I missed it remarks, just where where we are aware when do you anticipate sort of a normalization.

You know underlying payroll costs.

Yeah, I'll start Melissa may want to add as well you know as the stores are we opened we have ramped up as you can imagine store operations and have returned our employees to work, but we're remaining very disciplined about our costs and we're managing those to the lower sales trends that were cheating.

So the goal here is to strive to keep the percentage of spends that we do have sales consistent with what we've historically spent even if it's a declining sales trend.

One thing to note is in Q1, we did haphazard pay in our distribution centers that was in effect for the entire quarter, but we just continued that by the start of fiscal Q2 that was the call out of about 900000 that get hit in Q1 that will not hit unless of course, there's over surgeon so everything always how's that.

Strikes, but it's not anticipated to hit for the remainder of the year. We also right now Steve or in a situation, where we issued some temporary pay cuts we are slowly reversing those and expect those to be reverse out as we move through the rest of the calendar year, but basically planning to manage.

Role.

Quite tight still and try to manage it as close to sales trends as we possibly can.

Thank you and best of luck.

Thank you.

Our next question comes from Kate Mcshane with Goldman Sachs. Please proceed with your question.

Hi, Good afternoon. Thanks for taking my question. My question is centered around inventory you gave some great detail there I just wondered going into the second half how you're thinking about being positioned from an inventory standpoint and are you seeing as a result of the pen down about <unk>.

We knew the disruption but in terms of.

Factory capacity when it comes together what products.

Yeah, Let me Hi, Kate all I'll start on that you know and and the short answer is we are leaner inventory right now than we would like to be on certain items because as we noted a you know we ended the quarter with inventory down 9.4% and started the pandemic quite concern.

Finally in terms of the order flows we had coming in not knowing what we would sell in where and quickly reacted and have have pushed too to build inventory where needed and key skews, but we are chasing in a few categories and like you know every retailer. We've got 700 vendors I believe approximately in our merchandise categories.

Somehow some are better than others. Some have had a cobot issues I'm. So we're really just very much on top of that our merchants are doing a fantastic job working with supply chain and and bringing product and as quickly as they possibly can.

And we've made some good improvement I mean, we have with that which is great. So those those high sales volume categories is what we're chasing but we've just been on a dog on it and I've laid I've been really pleased with what I Ah you know, what we've been receiving and so it should really help Kate one other thing is we did always expect inventory.

<unk> to decline this fiscal year year over year, because last year opening up the second distribution center, we were building inventory for two facilities and now we're sort of rightsizing that so that we have the adequate levels that both facilities. Because you know Dallas continues to support the entire chain, while we were seating product a in average.

Game. So some of the working capital generation from inventory was always ambition for this fiscal year, just not quite to the degree that we saw in Q1.

Okay. That's very helpful. Then my second question was just with regards to the competitive landscape, especially going into the second half it doesn't sound like just in general retail was maybe a little less promotional than usual just in order to.

Figure out demand from only one channel et cetera. So I think opened up here in stores open or how do you see the competitive landscape evolving, especially when it comes to promotions and discounting.

Well, we're executing our fiscal 2020 marketing plan, which is going to be highly focused on on digital spend.

For obvious reasons and it will be somewhat of a reduced spend from fiscal 19. So we're proceeding with that and you know obviously, a we along with others in the home sector have benefited from so many customers being at home and you know our our mission. Our vision is to help them accomplish the projects and make the most of their of their home.

And so you know that has at that has certainly been occurring and particularly with our virtual in home that we've been doing that has been really well received and we're going to be rolling that out to all stores as well. So yeah, I I'm cautiously optimistic about the year I think the competitive landscape is not really.

Change that much for us at all.

And we're just going to continue to focus on what we do best and focus on our Differentiators and just be very very prudent and cautious and agile and nimble and flexible in running the business.

And the most I want to just have a quick Kate on the March inside of that because from a promotional perspective, you know our margin degradation. We thought tcs in Q1, 75% of that degradation was because of the search we saw an online going from about 12% of total sales last year to 47%. This year. So the balance was due.

To pro promotional activities and we definitely did see during at least at the first quarter initial part of depend on it customers opting more into the promotions that we were offering up to them, but as Melissa said, you know aren't really our goal on these promotions and just to stay relevant to our customers and.

I think what also might be helpful. For you to know is we didn't talk about how March and is expected to abate as we see a different share of online versus brick and mortar and certainly have seen that as we've moved into Q2. So just as a note while it's still early in Q2 and I know, we're not sharing outlook.

Look I can't say that year over year, our decline in gross margin trend has significantly improved since the beginning of the quarter.

So for the month of July right fiscal Q2 today right.

Thank you.

And the preservation of the sales went from 72% to 90% so right.

Our next question comes from Tim you for carrier with JP Morgan. Please proceed with your question.

Hi, Thank you so much for taking my questions I just wanted to understand the first quarter performance a little better last time. These who are in made me I think you mentioned you are retaining 76% of sales.

And events and yet you ended up with around 72, so could you elaborate on that a little bit did you see a slowdown in demand.

Given.

Probably some customers pantry loaded on some whole my then or was it more your supply chain issues like what drove the slow down in one Q.

It was good.

Yeah, I think the biggest explanation Tammy is as we proceed it into the quarter, we were up against steeper cost or custom closet sales from last year, we got a very very successful elfa free installation promotion in calendar may and June and with our stores closed essentially until.

June eight I think a day, we sort of reopened unlock the doors.

It's it's much more challenging we try very hard virtually in other ways Melissa spoke out, but it's more challenging to sell custom closets and a closed store environment. So within impaired I call. It impaired model of operations first doors. It made its harder to lap those custom closet sales, even though our incremental volume was growing every single week and.

And we were seeing a larger sales I can't tell you can we did we exceeded our expectations for the quarter in terms of sales and in terms of really all through the piano. So you know where we're pleased we knew that would be a at a tough bar to lap.

Got it could just a follow up on bad. So basically you saw incremental improvement Dan so format, but given cost some clause that was up against the pump bears and make to hire at much higher ticket item. That's why you sort of saw a little down in May and June is that.

<unk> way to look at it.

That's correct Yeah, that's right that's why the percentage to last year didn't improve albeit the dollar volumes escalated. So we were doing more per week. It was just up against a bigger bar. So the percentage challenge was there.

Got it got it and then you mentioned July was the strongest month of the quarter last year was it.

I'm, sorry, if I missed it but it wasn't due to some specific campaign that you you decided not to run this year or just.

It was just overall a strong month.

We just had stopped business yeah, yeah, nothing specific to call out.

Okay, Okay, and I, if I may ask one last question.

The outlook segment gross margin was very impressive it leverage a lot I do expect back to continue as you know so the rest of the yard and then also you mentioned some our mix being a tailwind for alcohol in the quarter could you elaborate on that a little bit adult.

Sure I'll start with the customer mix with the container store, having sales down 28%, we pulled back quite a bit on our purchase is particularly at the beginning of the pandemic and the intercompany margin that Alpha records in their segment is lower for Tcf. Then it is for their third party sales that they do.

So having a mix it with both in that mix, but also what they had is customer wise in Sweden. They had they're cut some of their customers that are simply more profitable where the ones that were doing better business, which is good to see so they also.

From a supply chain perspective, you know and efficiency perspective continued to do well. So two years. Your first part of your question. We have planned there. They are marching up this year. They did exceed our expectations in Q1, I would expect it not to continue quite at that rate, but we do expect them to see good gross margin trends.

This year.

Got it Super hub for thanks, so much.

Thanks, Tammy thank you.

Thank you guys. All the time, we have a question today I would like to turn the call back over to management for closing comments.

Thanks again, everyone for joining our call. We just appreciate your support and interest as always and we will look forward to talking with you next time.

Have a great day. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect. Your lines at this time and have a great day.