Q2 2021 Container Store Group Inc Earnings Call
Greetings and welcome to the container store second quarter 2021 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host Caitlin Churchill.
Thank you you may begin.
Good afternoon, everyone and thanks for joining us today for the container stores second quarter fiscal year 2021 earnings results conference call.
Today, our city small trials, Chief Executive Officer, and Jeff Miller, Chief Financial Officer.
After to teach and Jeff have made their formal remarks.
We'll open the call to questions.
Before we begin I need to remind you that certain comments made during this call regarding our plans strategies expectations regarding liquidity and goals are.
Anticipated financial performance and.
And our plans in response to COVID-19, and the potential impact of COVID-19 on our business.
Constitute forward looking statements are made pursuant to and within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Such forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements.
Those important factors are referred to in the container stores press release issued today and in our App.
Annual report on Form 10-K filed with the SEC on June 3rd 2021.
The forward looking statements made today are as of the date of this call and the container store does not undertake any obligation to update the forward looking statements. Finally speakers may refer to certain adjusted or non-GAAP financial measures on this call a reconciliation schedule of the non-GAAP financial measures. The most directly comparable GAAP measure is also.
Available in the container stores press release issued today.
A copy of today's press release, and Investor deck 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 speech the teach.
Thank you Caitlin and thank you all for joining our call today.
First discuss the highlights of our outstanding fiscal Q2 performance.
Led by an update on our growth initiatives.
Jeff will then review our financial results in more depth and discuss our outlook.
Our outstanding financial performance continued into Q2, as we delivered our highest second quarter sales results and our most profitable.
Second quarter on record.
As a reminder, this is our fourth consecutive quarter of record growth.
Profitability, demonstrating our ability to drive the business forward, while maintaining strong cost discipline in a complex economic environment.
For the quarter, we drove consolidated net sales of $276 million, an increase of 11% compared to last year.
An increase of over 16% compared to the second quarter of fiscal 2019.
Our robust sales performance combined with a better than expected gross margin result delivered exceptional earnings per share of 54 cents compared to an adjusted EPS of 43 since last year and eight in the second quarter of fiscal 2019.
Oh excellent financial performance was fueled by strong consumer demand and by continued progress against our strategic pillars, including driving more profitable sales as we purposefully reduced the depth breadth and duration of our promotional cadence.
As mentioned in our prior earnings call. We have focused our efforts this fiscal year on maximizing the productivity of our existing store base and our Q2 results reflect that hard work.
By Curating and resetting our merchandising assortment and bidding more storytelling into store visuals implementing more engaging promotional campaign and by adding more specialists to the selling floor. We believe we can deliver a better customer experience with much greater profitability.
Improving the fundamentals of our existing store base provides a solid foundation for our future growth plan.
Now while we are still in the early innings of these improvements we are extremely proud of our results to date.
In Q2, we saw continued strength across our assortment led by the impressive growth of our custom closet business at 22% compared to last year and for fiscal 2019.
Our custom closet business offers our customers superior quality affordability and customization and is a competitive advantage when paired with our general merchandise completion products and in home services.
As previously mentioned, we see a significant opportunity to drive market share for spaces over $2000 as demonstrated by the continued success of our premium is there a closet line with sales almost doubling compared to Q2 of last year.
Even more impressive with how our most affordable closet line Elfa performed during the September fall in Love with also campaign, which ended mid October.
By incentivizing customers to purchase more elfa products to receive a higher discount we were able to drive a much higher basket with two thirds of campaign sales delivering a basket size was approximately $3000.
Whether it's through more premium closet offerings, all through strategically orchestrated promotional events, we are delighted that our ability to deliver higher basket and improved sales productivity and our custom closet business.
When it comes to our general merchandise business, we delivered 3% growth compared to last year, which as a reminder, greatly benefited from the successful launch of the home edit Netflix series.
Compared to fiscal 2019, our general merchandise business grew a healthy 13%.
As part of our effort to drive more profitable sales growth in our general merchandise business. We made some bold changes to our promotional cadence during Q2, such as eliminating our traditional many office sale and significantly narrowing and shortening our customer favorites campaign.
As a result of these changes we not only saw higher average basket. We also saw a better overall margin for the campaign as compared to last year.
In addition, we surprised our customers with significant newness across our general merchandise categories and presented newly re merchandize discovery area, which began with garage at the end of Q1.
During the second quarter, we created a captivating kitchen gadget wall reduced our travel guests back department, while bolstering our closet Department.
We also introduced an absolute bliss way to experience, our Elfa Prepack and Grandma go assortment.
The new Alpha made easy discovery area, not only centralized all of our key packs, but also allowed us to add new kit and graphics to demonstrate the versatility of our pre tax.
These new discovery areas looks fantastic and the customer response has been extremely positive.
As mentioned on our last earnings call moving condos three show Netflix series parking Joy launched at the end of August with much anticipation.
However, we did not see a robust list and correlate itself. Despite dedicating our front of store presentation to our exclusive and sustainable contrary product line.
Fortunately, though the strength of our new discovery areas within kitchen, and closet helped offset the unmet expectation of Congress <unk> product sales.
With respect to our E Commerce channel, we continued to make progress in enhancing our online capabilities and reach.
Our site speed and customer time to interact improves with every major technology update and we are pleased with the initial reaction to the rollout of instant college and have to pay.
Oh I have to pay customers are over eight years younger than our average customer and we are committed to building a long standing relationship with this new younger demographic.
Additionally, we launched a new rating review tool.
Hence budging on our product pages to identify sustainable and exclusive products and are now actively working on simplifying the checkout process and streamlining our product pages.
To help combat rising shipping costs and cart abandonment rate, we show customers how much they can save by choosing a store pick up option when they're online basket was below the free shipping threshold.
This shift in messaging resulted in an increase in pick up orders.
I saw the enhancements have already created a cleaner customer experience.
Site performance and Leeward cart abandon rate we.
We will continue to enhance our e-commerce experience by investing in modern technology stocks to reduce friction and deliver a seamless customer experience.
Shifting gears I'd now like to speak about our incredible team.
Whether at our stores distribution centers or support center. Our teams are invaluable to the success of our business and it is their dedication passion and resolve that has enabled us to deliver such outstanding results to date.
Back in our most recent 2021 employee pulse survey our team members overwhelmingly share how proud they ought to work for the container store and that they are extremely excited about our future.
Given the strength of our financial performance, we are pleased to be in a position to restore pre COVID-19 benefit, including merit increases and 401k matching in addition to implementing variable based incentive plans and increasing our minimum wage to $15 per hour for all employees.
We remain diligent and steadfast and taking prudent steps to improve our employee value proposition and being the employer of choice.
I'm immensely proud of our execution during the second quarter, especially given the fluid environment, we continue to operate it.
While we're not immune to the increases in raw materials and freight costs, we were able to mitigate this risk through price increases less promotional activity and by encouraging in store pick up in Q2.
Jeff will discuss our financial outlook and how these pressures are expected to impact us in the second half, but I believe our performance to date is a great Testament to the caliber of our people and in a way that they are executing against our strategic pillars.
A quick update now on our three strategic pillars.
Third deepening our relationship with our customers.
We know our customers value our product offering and the services we deliver.
We believe we have an opportunity to enhance these relationships to help drive increased spend and expand our market share.
We enter the holiday season, well positioned despite the many headwinds and labor and supply chain.
We are also armed with the valuable learnings from prior years, where we have once again narrow down holiday packaging and assortment and we will be using visual merchandising strategies in store for me to our strength and our brand promise.
Our franchise store presentation with spotlight on new ways to holiday campaign without incredible kitchen assortment inspiring customers to think of new ways to prepare their kitchen pantries and fridges for the holiday season.
Our holiday kitchen products will feature speaking sets and aprons from food 52, cold brew coffee makers in theory with expenses from OXXO and exclusive product bundle from the cracking, Brian cricket, which will enable our customers to create some amazing label.
Additionally, our buyers have done an amazing job curating, new gift packaging and stocking Stuffers Vitaly compelling story.
From reusable and sustainably so get back boxes and bags to racially diverse center racks and automate our product offerings will highlight the many different and inclusive ways our customers celebrate the holidays.
Lastly, our new ways to holiday campaign will also be supported by the rollout of zone specialist in key areas of the store to help assist and engage our customers.
When it comes to brand new that evokes emotion. We are pleased to share. We are in the final development stages of our new brand campaign. In addition to the introduction of a new brand icon that will be recognizable for years to come we anticipate launching both the new brand campaign and icon in late Q4.
Finally, our pop program continues to grow at the end of Q2, we had $10 5 million pop stars and role as a reminder, about 75% of sales are linked to our pop program. We believe we can enhance our loyalty program, but rewarding a people level engagement with a new chair based loyalty program, which we.
We also aim to launch in late Q4.
Moving to our second strategic pillar expanding our reach.
We are thrilled to share we have entered into an exclusive multi year marketing partnership with Cassandra Austin found.
Founder of the cut about organizing method.
For a full best selling books.
With a G T V's Hot mess house.
Cassandra has an approachable style, we know will resonate with customers interested in transforming their lives through the power of the organization.
Create content for our brands to showcase a simple and approachable way to organizing that our customers can implement themselves with the help of our extensive product assortment.
Additionally, plans are being finalized to expand our store network.
We see the potential to add at least 100 additional doors in the coming years and anticipate the majority of these doors to mirror the smaller store format. We plan to open next year in Colorado Springs, Colorado.
We aim to concentrate our openings in a dozen key market where.
Well, we have the opportunity to gain significant market share.
We believe the smaller format stores can actually be more productive than our larger format stores on a square foot basis, and we look forward to sharing more details in the coming months.
Turning to our final strategic pillar strengthening our capabilities.
In Q2, we kicked off a materiality assessment project to help refine our ESG strategy.
However, we're not waiting for the completion of that assessment to address our ESG footprint.
During the quarter, we joined the U S E T. A green power partnership and we'll continue to take steps to lead the transition to a cleaner energy future.
Additionally, I'm proud to share customers will now see a green leaf badge on product side in store. So they can.
Can easily identify more than 1100 sustainable products, we carry.
Finally, I recently signed the C E O action pledge, which aims to rally the business community to advance diversity and inclusion within the workplace.
Again, we are still in the early stages of our ESG journey, but we continue to make great progress.
When it comes to technology. We are currently piloting a store inventory management system that shifts picking and packing work historically done in our stores distribution centers, creating added capacity for our stores to spend more time with customers on the selling floor.
Additionally, we are upgrading our store phone from traditional landlines to voice over IP. This change will not only reduce operating costs with each store, but will also allow us to efficiently route calls to our call center, so that store specialists, because gay spend more time, serving our customers in store.
In closing we are proud of our results to date and we could not be in a better position to go librarian.
Expand our footprint and drive value for all of our stakeholders simply put we are well in our way to becoming the best version of ourselves.
I'll now turn the call over to Jeff Jeff.
Thank you <unk> and good afternoon, everyone.
That's the piece reviewed our Q2 performance well exceeded our expectations and we are very proud of the strong execution by our teams across the board.
For the second quarter consolidated net sales were $276 million, reflecting a year over year increase of 11, 2%.
An increase of 16, 7% compared to the second quarter of fiscal 2019.
By segment net sales for the container store retail business were $259 4 million and 11, 3% increase compared to $233 million last year, and a 17, 2% increase compared to $221 2 million in the second quarter of fiscal 2019.
Custom closet sales were up 22, 1% compared to fiscal 2020 and contributed nine 6% of the 11, 3% year over year increase in net sales.
Other product categories were up three 1% in Q2 and contributed the remaining 1.7% of our net sales increase year over year.
Compared to Q2 fiscal 2019 custom closets were up 21, 7% and other product categories were up 13, 5%.
The disruption from COVID-19, spurred a strong acceleration in our online channel in the first half of fiscal 2020 in Q2 of fiscal 'twenty one.
We continue to see a shift back to brick and mortar stores and our online channel decreased 23, 9% year over year.
However, when compared to the second quarter of fiscal 2019, our online channel increased by 41, 8%.
Including curbside pick up our website generated sales in Q2 were down 24, 4% from last year, but up 44, 8% when compared to the second quarter of fiscal 2019.
Website generated sales represented a total of 19, 9% of Tcs net sales in Q2 of fiscal 'twenty one.
Compared to 29, 3% in Q2 last year and 16, 1% in Q2 of fiscal 2019.
We ended the quarter with online orders taken but not shipped totaling approximately $2 3 million compared to $6 5 million in the prior year period.
We also had unearned revenue of $22 4 million this year versus $16 4 million last year, driven by a large increase in custom closet orders taken but not yet installed.
Elfa third party net sales of $16 6 million increased eight 8% compared to the second quarter of fiscal 2020 X.
Excluding the impact of foreign currency translation also third party net sales increased five 7% year over year.
From a profitability standpoint, our consolidated gross margin for Q2 was 59, 3% compared to 58, 8% last year and 57, 9% in the second quarter of fiscal 2019.
By segment gross margin at the container store improved 60 basis points compared to last year, primarily due to decreased shipping costs. As a result of the previously mentioned channel shift away from online and into brick and mortar combined with less promotional activity and a favorable mix of products and services partially offset.
Set by increased freight and commodity costs in Q2 of fiscal 2021.
Tcs gross margin improved 110 basis points compared to the second quarter of fiscal 2019, primarily due to less promotional activity elfa.
Gross margin decreased 800 basis points compared to last year, primarily due to higher direct material costs associated with commodity price increases combined with an unfavorable customer mix elfa.
Elfa gross margin decreased 420 basis points compared to the second quarter of fiscal 2019, primarily due to higher direct material costs consolidated SG&A dollars increased 12, 7% to $114 1 million compared to $101 2 million in Q2 last year as a percent of sale.
<unk> SG&A increased approximately 50 basis points year over year, primarily reflecting our planned restoration of expenses that were temporarily pulled back during the pandemic, including merit increases for all of them.
<unk> K contributions.
<unk> mentioned investing to reward talent is a priority and the outperformance we're delivering from a sales perspective, as an enabling us to lean in on this front by increasing our starting with minimum wage to our stores and all employees to $15 an hour and implementing variable based incentive plans throughout the organization.
As compared to the second quarter of 2019, SG&A decreased 690 basis points as a percent of sales driven primarily by fixed cost leverage on higher sales combined with less marketing spend.
Our net interest expense for the second quarter of fiscal 2021 decreased 29, 1% to $3 2 million from $4 5 million in the prior year due to a lower principal balance on our senior secured term loan facility combined with lower interest rates.
The effective tax rate for the quarter was 25, 7% compared to 31% in the second quarter last year. The decrease in the effective tax rate is primarily due to the impact of permanent and discrete items on higher pre tax income in the second quarter of fiscal 2021.
Net income for the quarter on a GAAP and adjusted basis was $27 2 million or 54 cents per diluted share as compared to GAAP net income of $20 2 million or <unk> 41 per diluted share in the second quarter of last year.
Net income for the prior year period was $20 9 million or 43 cents per diluted share.
Our adjusted EBITDA increased eight 2% to $47 7 million in the second quarter this year compared to $44 1 million in Q2 last year.
And increased 112, 9% compared to the $22 4 million in Q2 of 2019.
Turning to our balance sheet, we ended the quarter with $23 1 million in cash $166 4 million of net debt and total liquidity, including availability on our revolving credit facilities of approximately $132 5 million.
Our current leverage ratio is less than one times.
Consolidated inventory ended Q2 up 47, 1%.
Keep in mind that last year, we have taken actions to cut inventory levels in order to preserve cash.
This year, we continued to increase unit levels to support strong sales trends and to account for longer lead times, resulting from supply chain disruption.
And like other retailers, we continue to experience freight and shipping cost headwinds along with higher commodity prices, which are reflected in this increase in our inventory we.
We have and plan to continue employing multiple methods to help mitigate the impacts of higher costs, which include vendor negotiations actively managing our supply chain, along with adjusting our retail pricing and promotional cadence.
We generated $10 4 million and free cash flow compared to last year. When we generated $84 3 million as a reminder, last year, we focused on preserving cash in the first half of fiscal 2020 due to the uncertainty related to the pandemic.
Including the just mentioned inventory management actions as well as deferring almost $12 million of cash lease payments to future periods.
On that note, we paid down approximately $1 1 million of the deferred cash lease payments in the second quarter of fiscal 2021.
Outstanding balance as of October 2nd 2021 was $1 1 million, which we paid over the remainder of the fiscal 2020 one.
Now for our outlook we.
We expect Q3 consolidated sales to decline as compared to last year by approximately 5%.
Adjusted EPS in the third quarter is expected to be approximately 20.
The expected sales decline in Q3 amounts to a 15% increase as compared to the third quarter of fiscal 2019, and an expected adjusted EPS improvement of over 12 cents for 150% over that same time period.
Consistent with our approach on our last call. We are not providing full year guidance. However, given our continued outperformance in Q2, we are sharing and updated scenario for sales growth and resulting associated margin outcomes.
In a scenario where.
Our fiscal 2020, one sales increases are slightly above the mid single digit range compared to last year, we would expect operating margin to decline slightly and to deliver growth in adjusted EPS year over year.
With regards to gross margin in this scenario, we would expect at least 200 basis points of year over year gross margin pressure in the second half of fiscal 2021, given the significant freight and commodity cost headwinds with less than 200 basis points of pressure in Q3 and more than 200 basis points of pressure in Q4.
Despite these headwinds we would still expect slight gross margin improvement on a full year basis and the sales growth scenarios.
On the SG&A side as previously mentioned, we have restored certain expenses that were temporarily pulled back in fiscal 2020 as part of our pandemic management strategy such as reinstated point when can match merit increases while also implementing variable based incentive plans and increasing our minimum wage to $15 an hour for all employees there.
And the slightly above mid single digit sales growth scenario, we expect overall second half fiscal 2021, SG&A dollars to be slightly higher in the second half of fiscal 2020.
With increases in Q3, SG&A dollars year over year and relatively flat SG&A dollars in Q4.
Please note the fourth quarter last year included a 50 <unk> week that contributed $17 7 million in sales $5 3 million in adjusted EBITDA and seven of EPS.
My comments on sales margins.
In expenses versus fiscal 2020, do not adjust for the impact of the 50 <unk> week last year.
We are proud to be on track to deliver EPS growth for the full year overall and this sale scenario I outlined even with the margin pressures that build through the fiscal second half and despite being up against the 50 <unk> week here.
For the year, we still expect total capital expenditures to be approximately $47 million interest expense to be approximately $13 million and our effective tax rate to be approximately 30%.
I'll now pass it back to <unk> for closing remarks.
Thank you Jeff in closing we are thrilled with our performance for the first half of fiscal 2021, we outperformed and executing against our three strategic pillars and the bold changes made to our promotional campaigns paid off.
While we will face intensifying external headwinds in the second half as Jeff outlined I believe the container store has never been in a stronger position to compact those headwinds and to fulfill our brand promise of transforming lives through the power of our organization.
This concludes our prepared remarks, I'll now turn the call over to the operator to open the lines for questions.
Thank you at this time, we'll be conducting a question and answer session.
To ask a question.
Star one on your telephone keypad.
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One moment, please while we poll for questions.
Our first question is from Steven Forbes of Guggenheim Securities. Please proceed with your question.
Good evening so dish.
Realizing maybe early but you mentioned the finalization of your growth plans here so.
I think it's an important question to put out here.
Just curious if you can you give us any color on how you're thinking about the cadence of potential pace of unit growth going forward given the the leverage ratio of the business today.
And remind us what the initial cash investment of a small format store is.
Yeah, Hey, Steve how are you.
Doing all right well.
Good good good good yeah, I'll take the first part of that question and let.
Jeff answer the cash question.
But we as you noted we've absolutely now have determined what we believe the right footprint is going to look like for our store growth.
And we're now very much in the process of looking at our site selection.
As you know these things take time, whether reflecting the slight in the lease negotiations and then the build out.
But we do feel that we'll be in a position to be able to talk about the number of doors that we're opening primarily starting off in 2023.
In the meantime, though we continue to stay focused.
And maximizing the productivity of the existing store base, which as you know is critical.
Critical prerequisite for our store growth plans and we've got a lot of great work when it comes to improving our productivity you've seen it in the results. When we think about our custom closet business, whether that's selling more premium spaces or incentivizing customers to purchase more affordable spaces, and it's really paid off we saw at <unk>.
2% increase in both Q1 and Q2 versus the same time period in 2000, and 2019 and Thats really impressive.
And we're also working extremely hard improving the profitability growth of our general merchandise business, which grew 13% in both Q1 and Q2 versus the same time period in 2019.
That focus in terms of our custom closet business general merchandise plus adding more specialists on the selling 14 engage with our customers has helped drive our average basket and will be the precursor as we look to open up more doors in the coming years.
Yes, Steve this is Jeff.
In answering your question about the total cost I mean, we haven't actually priced it all out.
We're in the process of doing Colorado Springs, right now, but suffice to say it will be.
Much less than what we were investing in the and the larger full sized footprint stores, which was around.
Anywhere from $4 million to $5 million for those stores.
And the only thing I would add to that.
Steve Sorry, one thing to add on that is again as we look at the smaller box format stores.
Productivity, we believe is going to be much higher than even some of our existing stores because of the size of the store and what we think we can get out of it and all the work that we're doing right now.
Maximizing productivity with existing stores. So I think the performance is going to be a very.
Very positive.
Thank you and then just a quick follow up.
I was wondering if you could expand on your your comp expectation for the third quarter, but down 5%.
As I look online right you have to spend now get later promotion I think that probably should feed right into the other category performance and hopefully the holiday departments, but maybe just talk about your optimism around holiday in particular, given the performance over the past three years and.
And if you could parse out what's sort of the underlying expectation for Tcs closets in the third quarter.
Yeah, we kind of look at when we look at the comp comparison really over 2019 that seems to be a really good indicator.
There's less noise when you look at it from that perspective, and as I mentioned in Q1 and Q2, we are performing quite well and we expect to see similar performance as we enter into Q3.
Our holiday season, right now is extremely well positioned I just came back from Alpha Affleck store and if you get a chance to go into our stores you see that out front of store presentation look phenomenal without incredible kitchen assortment backed by well narrow did very compelling holiday.
<unk> and stocking stuffer assortment as well I mean, who asked also busy and in fact I saw I heard actually of a customer who purchased over $1100 worth of packaging.
Holiday packaging and she was that excited to see what we have to offer so that I think speaks up to the pent up demand is as we're in a very great position to be able to satisfy that and we have an adverse event.
Event going on right now again, it's the second one that we're having now for the year and initial indications show that ought to be a very successful strong.
Event for us as well so I feel good about as we enter into the back half as you know.
A lot of work to do and but we're in a great position to be able to deliver on our expectations.
Thank you and best of luck.
Thank you.
We have reached the end of the question and answer session I will now turn the call back over to say he's malhotra for closing remarks.
Yeah.
Great well, thank you for joining us today and for your belief in the container store and have a great evening.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
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