Q4 2021 Container Store Group Inc Earnings Call
Greetings and welcome to the container store fourth quarter 2021 earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during todays conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn this conference over to your host Ms. Caitlin Churchill Investor Relations. Thank you Ma'am you may begin your presentation.
Good afternoon, everyone and thanks for joining us today for the container store fourth quarter and fiscal year 2021 earnings results Conference call.
Today, our expertise Malhotra, Chief Executive Officer, and Jeff Miller, Chief Financial Officer. After Citation Jets have made their formal remarks, we will open the call to questions. There are supplemental five there'll be referenced in today's call that are available online at Investor Day, you know sort of dot com.
Before we begin I would like to remind everyone that certain matters discussed in today's conference call are forward looking statements relating to future events management's plans and objectives for the business and the future financial performance of the company that are subject to risks and uncertainties actual results could differ materially from those anticipated in these forward looking.
Statements the risk factors that may affect results are referred to in the press release issued today and.
In our annual report on Form 10-K filed with the FCC on June 3rd 2021 as updated by our quarterly reports on Form 10-Q, and other public filings with the U S Securities and Exchange Commission. The forward looking statements made today are as of the data.
Hema 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 call. A reconciliation schedule of the non-GAAP financial measures most directly comparable GAAP measures is also available on the coherent first press release issued today a copy of today's press release and Investor deck, maybe obtained by visiting the Investor Relations page of the website at Www Dot com.
Store Dot Com I will now turn the call over to teach.
Caitlin and thank you all for joining us today.
Our call today, we will follow a different format.
Lynn mentioned, we have posted a slide deck to our Investor Relations site.
That will accompany our remarks today.
I'll first highlight key financial 2021 accomplishment.
And then Jeff will review the details of our fourth quarter and full year financial results, followed by our outlook for fiscal 2022.
I'll, then review our exciting path to $2 billion.
Which will be followed with additional financial details from Jeff.
Well, then open up the call to questions.
I'd like to begin our call today by highlighting the great accomplishments, we have achieved over the past fiscal year.
Which was capped off by a stronger than expected fourth quarter performance.
As shown on slide four about supplemental deck.
Fiscal 2021 we delivered the best financial results in the company's history with net sales of over $1 billion for the first time.
This performance represented growth of 10, 5%.
To the 53 week fiscal year 2020.
19, 5% compared to the 52 week fiscal year 2019.
And despite ongoing macro headwinds related to inflation.
And supply chain.
Through our refined promotional cadence.
Rising actions and expense control, we drove operating margin expansion.
150 basis points compared to fiscal 2020, and 680 basis points of expansion compared to fiscal 2019.
Fiscal 'twenty, 'twenty, one, which truly an outstanding year the container store.
Over the past year, we've been living out our mission to transport wide through power of organization.
And have built a strong foundation for the container store next chapter of growth.
We accomplished a great deal in fiscal 2021 and we maintain our focus on our three strategic pillars deepening our relationship with customers expanding our reach and strengthening our capabilities.
With regards to deepening our relationship with customers, we successfully reduced our promotional cadence throughout the year, which continued without fourth quarter transport with alpha event.
The duration of the event was reduced by more than two weeks and the average discount given was approximately 19% compared to 30% in the prior year.
I'll spend more save more strategy delivered a 33% increase in average base values with approximately 60% of the event sales coming from average tickets that were over $2000.
With less dependence on promotions in fiscal 2021 we focused on enhancing our in store experience by adding store greta's front of store products spotlights and product demonstrations.
We continue to align our merchandising assortment to customers interests and values, including offering over 1600 sustainable products, an increase of 60% over last year.
We proudly ended the fiscal year with a net promoter score of 79 and strong average conversion rates and average tickets.
During the fourth quarter, we launched our new branding campaign will come to the organization.
And fully re imagined that a new company logo.
The campaign resonated with new and existing customers across our channels and resulted in a record breaking sales day, one to 'twenty to 'twenty two.
I'll tick tock hashtag challenge.
You have drawn was also well received and resulted in over 8 billion video views.
We closed out the quarter by launching our new terabytes loyalty program organized insider to not only attract new customers, but also to reward a deeper level of engagement with existing customers.
Kosmos expressed a genuine excitement for our new program and the many benefits that come with it.
With regards to expanding our reach.
We fortified our position in the $6 billion market for custom closets.
The acquisition and integration of closet works.
Through this acquisition, we expect to significantly improve our product offering gross margin profile and sales of premium wood based custom spaces.
Additionally, we expect our new premium wood based offering to complement our premium metal based offering a zero, which in fiscal 'twenty. One so it sales more than double over fiscal 2020.
Over the past year. We also increased the number of design specialists focused on designing and selling premium spaces from 64 to 96 with at least half of the designers selling more than a million dollars in fiscal 'twenty one.
So sales of spaces over $2000 were up 26% in fiscal 'twenty, one when compared to fiscal 2020, demonstrating our ability to sell premium spaces.
We also made significant strides this year in e-commerce.
Looting improving site speed across our category and product pages by 45%.
We added more compelling content enhance the browsing experience and streamlined checkout process.
Positive impact of these enhancements with fully enjoyed by customers. During the biggest online sales day in the company's history on to 'twenty to 'twenty, two where E. Commerce sales were eight and a half times higher than a typical average day.
Additionally, we are now consistently shipping 90% of orders in two days compared to only 38% last year.
Finally, we continued to strengthen our capabilities.
Q4, we successfully launched our first ever mobile app to meet customers, where they are already shopping.
The App features a convenient biometric login.
And organized inside a dashboard that makes it simple for customers to shop using their digital wallet.
Customers can also use the app to check in order status find.
Find organizing inspiration.
Use it in store to scan barcodes for more product information and auctions.
Since launch we have driven nearly 50000 downloads of our mobile App and it currently boasts a full 0.7 star rating.
Mobile App sales continue to grow and are currently accounting for over 4% of our total online sales with a 35% higher average ticket than mobile web sales.
Additionally, we successfully piloted a mobile point of sale solution in store, so customer transactions can take place efficiently and directly on the sales floor.
With regards to being an employer of choice. We've made great progress, we raised our hourly minimum wage to $15 per hour and recognize the incredible contributions to our company's success in fiscal 'twenty, one by providing a one time special bonus to our part time and full time hourly employees.
Starting in fiscal 'twenty, two we will offer a paid time off benefits to part time employees and all employees of the company will benefit from variable incentive plan tied directly to our company's performance.
Diversity equity and inclusion continues to be a focus for our company and we're proud of both the ratio and gender diversity reflected companywide with 42% of our total workforce identifying as black indigenous or a person of color and 64 identifying gets female.
We're also investing in diverse vendors through our supplier diversity program.
For our environmental social and governance stock strategy, we completed an assessment to identify key areas of focus.
Ryan to issue our first sustainability report next month.
To demonstrate our commitment to creating a better environment, we are focused on reducing consumption and transitioning to renewable energy.
Since fiscal 'twenty, one the power consumed by all of our stores distribution centers and support center is offset by our investments in 100% renewable energy.
As we look ahead, our strategic pillars will serve to drive future growth and address the incredible opportunity we have to gain market share.
As I reflect on my first full year as CEO I am in awe of what our teams have been able to accomplish.
Our people are the lifeblood of this great organization and they are executing our strategy brilliantly.
I'm immensely grateful for their contributions and energized for the year ahead.
With that let me now turn the call over to Jeff to review, our strong fourth quarter performance in more detail.
Thank you good afternoon, everyone as the team mentioned, we're very pleased with our strong fourth quarter performance, which exceeded our expectations from a sales and a profitability perspective.
The fourth quarter results were driven by our successful branding campaign on to 'twenty to 'twenty two that drove record breaking single day sales as well as a less promotional transform with alphabet, which drove higher than anticipated gross margins.
Also as a reminder, the fourth quarter of fiscal 2020 included an extra week, which contributed incremental sales of $17 7 million.
As highlighted on slide seven of our supplemental deck for the fourth quarter consolidated net sales were $305 5 million, which decreased two 9% year over year.
Driven by a 580 basis point negative impact of the 50 <unk> week in fiscal 2020.
Compared to the fourth quarter of fiscal 2019 consolidated net sales increased 26, 6%.
By segment sales for the container store retail business were $286 5 million a decrease of two 6% compared to the fourth quarter of fiscal 2020.
This decrease was driven by general merchandise categories, which were down eight 7% to the fourth quarter of fiscal 2020, and up 29, 3% to the fourth quarter of fiscal 2019.
Custom closets were up three 6% for the fourth quarter of fiscal 2020.
And up 26, 6% for the fourth quarter of 2019.
I'd like to note that historically, when we referred to custom closets. We have included the general merchandize closet Department.
However, starting in fiscal 2022, when we refer to custom closets or custom spaces.
We will exclude the general Merchandised closet Department from Big amounts and only include the results of our custom closet product and service offerings.
We are making this change due to the importance of custom closets and custom spaces on our path to $2 billion, which strategic will discuss later on in this call and a desire to provide more transparency to the closet product and service offerings.
Sales from our online channel decreased 25% year over year, reflecting a normalization from pandemic driven peaks and online sales.
Online sales increased 29, 1% from the fourth quarter of fiscal 2019.
Including curbside pick up our website generated sales in Q4 were down 19% from last year, but up 56% when compared to the fourth quarter of fiscal 2019.
Website generated sales represented a total of 22, 4% of Tcs net sales in Q4 of fiscal 2021.
Compared to 27% Q4 last year and 18, 4% in Q4 of fiscal 2019.
We had unearned revenue of $22 6 million this year versus $19 5 million last year.
Elfa third party net sales were down seven 1% year over year to $19 1 million.
But increased 10, 4% from the fourth quarter of fiscal 2019.
Excluding the impact of foreign currency translation Elfa third party net sales increased one 8% year over year.
Consolidated gross margin for Q4 was 57% compared to 59, 3% last year.
With the decrease driven by increased freight and commodity costs.
By segment gross margin at the container store decreased 10 basis points compared to last year, primarily due to increased freight and commodity costs, partially offset by less promotional activity and decreased shipping costs. As a result of a lower mix of online sales in the fourth quarter of fiscal 2021.
Tcs gross margin declined 70 basis points compared to the fourth quarter of fiscal 2019, primarily due to increased freight costs.
Elfa gross margin decreased 750 basis points compared to last year and decreased 820 basis points compared to the fourth quarter of fiscal 2019, primarily due to the higher direct material costs.
Consolidated SG&A dollars increased 3% to $127 1 million compared to $123 4 million in Q4 last year.
As a percentage of sales SG&A increased by 240 basis points versus last year, primarily due to increased marketing costs increased compensation and benefit costs as well as fixed cost leverage in the prior year associated with incremental sales from our 50 <unk> week.
As compared to the fourth quarter of 2019 S.
SG&A decreased 240 basis points as a percent of sales driven.
Driven primarily by fixed cost leverage on higher sales.
Net interest expense in the fourth quarter of fiscal 2021 decreased 14, 8% to $3 2 million from $3 7 million in the prior year.
Due to a lower principal balance on the senior secured term loan facility.
The effective tax rate for the quarter was 31, 5% compared to 25, 8% in the fourth quarter of last year.
The increase in the effective tax rate was primarily due to the impact of discrete items on lower pre tax income in the fourth quarter of fiscal 2021.
Net income for the quarter on a GAAP basis was $23 2 million or <unk> 46 per diluted share as compared to $35 1 million or <unk> 69 per diluted share in the fourth quarter of last year, and $12 5 million or 26 cents per diluted share in the fourth quarter of 2019.
Adjusted net income was also $23 2 million or <unk> 46 per diluted share as compared to $35 7 million or <unk> 71 per diluted share last year. As a reminder, the extra week in fiscal 2020 contributed seven in EPS and adjusted EPS.
Adjusted EBITDA decreased to $46 4 million in the fourth quarter. This year compared to $59 5 million in Q4 last year, which included approximately $5 3 million from the extra week and increased 29, 9% compared to Q4 2019.
Turning to the balance sheet on slide eight of our supplemental deck. We ended the year with $14 3 million in cash $162 5 million and total debt.
In total liquidity, including availability on our revolving credit facilities of approximately $121 1 million.
Our current leverage ratio is approximately one times.
We ended the year with consolidated inventory up 47, 6%.
Primarily due to inbound freight headwinds along with higher commodity prices, which are reflected in this increase in the value of our inventory.
On a unit basis inventory is up approximately 13%.
Which reflects the fact that last year, we were chasing inventory due to supply chain disruptions and levels were lower than we would liked.
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.
Capital expenditures totaled approximately $33 4 million compared to $17 2 million last year, and we generated $23 6 million and free cash flow compared to $119 5 million last year.
Fiscal 2020 free cash flow, reflecting our effort to preserve cash 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 the deferred cash lease payments were fully paid back as of the end of fiscal 2021.
Turning to our fiscal 2020 to outlook on slide 11.
As we contend with the current dynamic macro environment for the full year, we expect consolidated net sales of approximately $1 125 billion driven.
Driven by a low single digit range increase in comparable store sales and two planned store openings.
We did not consider comparable store sales to be meaningful metric in fiscal 2020, or 2021 because of the pandemic related store closures and relatively few store openings. However, we do plan to present comparable store sales again in fiscal 2022.
Based on low single digit consolidated sales growth for fiscal 2022, we expect operating margins to be in the high single digit range approximately.
Approximately two thirds of the anticipated year over year operating margin decline is expected to be driven by SG&A deleverage as we annualize certain costs that we brought back into the business in the second half.
2021.
As well as increased labor costs as staffing has returned to normal levels.
The remainder is expected to be driven by gross margin pressure associated with freight and commodity cost increases.
Interest expense is expected to be approximately $13 million and our effective tax rate is expected to be approximately 28%.
As a result, we expect earnings per diluted share of approximately $1 20 to $1 30.
With $51 million assume dilutive shares outstanding.
Capital expenditures are expected to be approximately $60 million to $65 million for new stores technology infrastructure and software projects and existing store merchandising and refresh activities.
In the first quarter, we expect consolidated sales to increase in the mid single digit range driven entirely by a comparable store sales.
There are no new store openings planned to occur in the first quarter.
We expect earnings per diluted share to be approximately 15 to 20.
With operating margins in the mid single digit range.
Lower gross margins compared to last year are expected to drive a little over half of the operating margin decline.
As a reminder, in the first quarter of fiscal 2021 we proactively took retail price increases and changed our promotional strategy in anticipation of.
Of inflationary freight and commodity costs that we expect to continue to experience.
The remaining decline is related to expected SG&A deleverage as expenses and staffing are restored from depressed pandemic levels.
As a reminder, in Q1 of fiscal 2021, we are still working to fully staff our stores and we have not yet restored certain expenses that were temporarily pulled back in fiscal 2020 as part of our pandemic management strategy.
Now I'll turn it back to cities to talk about our strategic pillars and the path to 2 billion and then I'll provide additional details of our long term financial outlook before we open up the call for questions.
Cities.
Thank you Jack turning to slide 13, while fiscal 2022 will be a unique year as we all contend with the current macro environment. We will continue to stay focused on the long term opportunity we have ahead.
Assuming inflationary pressures pressures subside our path to 2 billion plan through fiscal 2027 is expected to achieve low double digit operating margins.
Low double digit sales growth.
Underpinning our growth expectations is that leadership position in the home and storage organization space.
Along with our three strategic pillars deepening our relationship with customers expanding our reach and strengthening our capabilities.
As you've heard us discuss before today the container store represents only approximately 5% of the 20 billion plus total addressable market for home storage and organization.
We believe we are well positioned to continue to grow within this market irrespective of the total market growth as our strategy is our focus on driving growth and market share gains.
While others have entered our highly fragmented category.
No other retailer all custom closet provider delivers on the full experience.
With a focus on solutions the container store provides the largest breadth and depth of products dedicated to storage and organization.
Offers affordable and premium custom spaces in both metal and wood and delivers specialized in store and in home services.
This end to end offering combined with our knowledgeable friendly and engaging specialists represents the power of our company and brand and is what sets us apart as a leader within the industry.
As we look ahead. It is this strong foundation that will support our growth.
I will now discuss how we aim to achieve our low double digit sales growth, resulting in low double digit operating margins through fiscal 2027.
Our expected path to $2 billion, we will continue to be powered by our three strategic pillars as shown on slide 15.
We aim to deepen our relationship with customers through our compelling product assortment impactful branding and enhanced loyalty program.
First as it relates to product.
In fiscal 'twenty, two and beyond we aim to build on the success, we have achieved in our product assortment from growing out sustainable product offering to leveraging our powerful collaborations and by introducing new and innovative products.
We also believe we can expand our strong private label assortment.
Which are exclusive quality products designed and developed by the container store that enjoy higher gross margins.
While growing sales in underpenetrated categories like garage and consumables.
For example, we plan to expand the number of sustainable Skus within our assortment from 15% to at least 35% by the end of fiscal 'twenty seven.
In fact, all about clear plastic offerings manufactured by I design are expected to transition to recycled plastics by 2025.
The transition is expected to remove 500 million plastic water bottles from landfills in 2022 alone.
Additionally, our new innovative private label and exclusive side profile dropped Brown shoe box is made of 100% post consumer recycled materials and.
And with its easy snap together assembly is expected to reduce the number of containers needed for transportation by 50% per year.
Leveraging the strength of our non alpha private label assortment, which represents 26% of sales we're excited to expand our offering in key categories.
For example, our private label everything organize the collection is expanding with eight new products perfectly sides, so customers cabinet and pantries.
The everything organize the pantry Ben was designed using gears of customer feedback.
It is made of recycled plastic features in front handled but ease of caring and has a removable divider to create categories.
The poultry bedding modular stackable and gives customers an Instagram where do you look.
We believe the everything organize a collection can expand deeper into the kitchen category as well as into the bathroom and office.
Regarding our powerful collaborations we have found influencer partnerships to be effective methods and showcasing the life transforming benefits of organization.
Product development is a key area that will continue to benefit from these collaborations as how influential partners are a great resource for fresh content inspiration and innovative products.
For example, we plan to launch a new sustainable product line. This summer Rosanna Pacino by I design.
Rosanna as a Youtube personality actress author and finger, we believe Rosanna has the potential to attract a larger and younger audience to the container store through her engaged social media followers.
With over 13 million subscribers on Youtube alone.
We also plan to expand our product offerings in the garage category.
But we are currently underpenetrated.
This is a key area of the home that also benefits from storage and organization.
Capitalizing on the reset we completed in fiscal 'twenty. One we now have the floor space needed to introduce how would base Preston garage collection expand the gladiator product offering and add new garage accessories blackout private label heavy duty stackable garage totes.
Lastly, as we plan for the future. We also see alpha playing a larger role in the garage category with more dedicated options.
To encourage repeat visits from loyal customers, we look to expand our consumables offering beyond our current laundry and cleaning products.
For example in fiscal 2022, we plan to introduce luxury home fragrance candles and smart Diffusers such as last code in New York and PURA.
But with regards to branding.
We will continue to support our new campaign welcome to the organization.
It is an invitation to all to start their organizational journey.
As of April 2022, unaided awareness for the container store with only 10%.
Whereas aided awareness was 73%.
By deploying and always on branding campaign, we aimed to increase both unaided and aided awareness in the coming years.
Finally, as previously mentioned in the fourth quarter of fiscal 2021, we launched our new tear based loyalty program organized insider.
With a 26% active rate in our old loyalty program. We knew there was significant opportunity to better engage with our customers and provide rewards for their frequency and level of spend.
As of launch we are already seeing a healthy average ticket size for each of our three tiers enthusiast experienced and expert with the highest tier spending approximately 50% more per transaction than our lowest here.
Additionally, we're seeing over 60% higher average tickets for loyalty members compared to non loyalty members.
Organized insider is the glue that connects us to our customers and we look forward to sharing more as the program advances.
Moving to slide 17, as we look forward a greater emphasis will be placed unexplained in our store network.
<unk>, our e-commerce business and amplifying our focus beyond custom closets to custom spaces.
Starting with the expansion of our store network.
We've spent a lot of time evaluating and maximizing the productivity of our existing store network and format.
Based on our learnings this past fiscal year and going forward, we plan to primarily open smaller format stores ranging from 10000 to 15000 selling square feet.
In the smaller format stores, we have targeted sales productivity to be at least $400 per selling square foot within its first year of opening.
We also aim to deliver an uncompromised custom closet offering an accumulated general merchandise assortment for our most compelling products within each category.
Customers will still have the ease and flexibility to purchase our extended general merchandize assortment online thanks to our in store technology.
While we still see a path to at least 100 additional stores.
We are excited to target an additional 76, new stores by fiscal 'twenty seven for a total of 170 locations focusing primarily in key existing markets.
As of today, we have approximately 25% of these stores targeted and active and our pipeline with planned openings over the coming years.
We're also eager to open our first small format store in Colorado Springs, Colorado, and the fall of 2022.
Load by another planned smaller format store in Salem, New Hampshire in the winter of 2022.
As we ramp up store expansion capabilities and increase our pipeline. We currently expect approximately one third of the Senate six new stores to open in the first three years and.
And the remaining stores to come by fiscal 'twenty seven.
Jeff will further discuss our expectations for new store economics, a bit later.
Moving to our expectations for our online channel.
COVID-19 created a step function change for many retailers with their direct to consumer penetration and we are similar.
Our online sales increased from 11, 5% of net sales in fiscal 2019% to 22% in fiscal 2020.
While our online sales penetration has normalized from pandemic peaks it is higher than pre pandemic levels at 13% of net sales for fiscal 'twenty one.
As previously mentioned fiscal 'twenty, one was a foundational year and improving our e-commerce capabilities and experience.
We have introduced several digital initiatives to drive online growth, including enhanced payment methods, such as after pay and Paypal delivery transparency in fulfillment with Navarre and install costs and improving the overall website experience.
These foundational investments along with a continued focus on digital marketing strategies and social commerce opportunities. We believe we can achieve an online sales CAGR in the high teens, which translates to an online sales penetration of almost 20% in fiscal 'twenty seven.
On slide 17.
Yeah.
As I mentioned earlier custom closets represents a 6 billion dollar market opportunity.
Of which we own a small share today.
In fiscal 'twenty, one we demonstrated our ability to sell premium lines and increased the number of in home design specialist. Additionally.
Additionally, the integration of closet works and the related introduction of our new premium wood based offering the Preston collection enhances our assortment and will be instrumental in our ability to capture market share in.
In fact, I'm delighted with the rollout pace of depressed and collection across all of our stores, which should be completed by the end of July .
The pipeline of orders for our New collection is also very encouraging.
With the Preston collection, we now have the capability to move beyond custom closets to custom spaces, which includes closet living and garage spaces.
We can offer these custom spaces at a range of price points and materials, which we believe will differentiate us in the marketplace going forward.
Additionally, we expect market share growth to be margin accretive as we now own the manufacturing capabilities for our wood baseline just like we do from that baseline.
Looking ahead, we expect to expand our manufacturing capabilities and plan to open two additional wood based manufacturing facilities by fiscal 'twenty seven to support the meaningful growth about customer space business.
Additionally, we continue to see business to business sales is another area of growth.
Earlier this year, we brought the <unk> team in house to better position us to capitalize on the opportunity as we target multiple end markets, including apartments.
Townhomes retirement communities hotels and offices.
With the acquisition of closet works, we will be a one stop shop for both metal and wood based systems, while meeting the unique needs and customization for each space in market.
Moving to our last and third pillar strengthening our capabilities as we enter this new phase of growth and expansion, we will be intently focused on scaling operations, while still improving operational efficiencies and effectiveness.
In addition to the opening of the two wood base closet manufacturing facilities. We also plan to open a new distribution center by fiscal 'twenty seven.
As mentioned earlier, our people are the lifeblood of this great organization and we will continue to invest in them to ensure that we have the talent necessary to fuel the path to $2 billion.
We know the importance of culture in our organization and we will continue to strive to be an employer of choice.
From a technology perspective, our investment plan includes disaster recovery cloud migration and enhancements to the overall customer experience.
With continuing investments in infrastructure people and technology, we still intend to leverage SG&A to achieve low double digit operating margins over time.
Before I turn the call over to Jeff to review some additional financial details around the path to $2 billion I want to reiterate how excited and confident we feel about the opportunities we see ahead.
Our teams have the flexibility and tenacity required to operate in this dynamic environment, while executing our mission and delivering on our objectives.
With that I'll turn it back to Jeff.
Yes.
Thanks to teach.
City shared our long term growth expectations focus on delivering on low double digit sales growth and low double digit operating margins over the next six years, resulting in approximately two times operating profit dollars from fiscal 2021.
As we move beyond fiscal 2022 and assume that the elevated inflationary pressures. We are currently experiencing will look day, we expect to drive a low double digit consolidated sales growth CAGR through fiscal 2027.
A low double digit consolidated sales growth encompasses low single digit comparable store annual sales growth included increased e-commerce penetration.
It also includes our goal of opening 76, new stores by fiscal 'twenty seven that are expected to generate approximately $400 million of incremental revenue.
In addition, we expect slight operating margin expansion.
Driven by a stabilized gross margin rate in the high 50% range.
And SG&A leverage.
We aim to achieve EPS of over $3 per share by fiscal 2027.
And generate positive free cash flow every year to support the path to $2 billion.
A key component of our growth strategy will be store openings and we've provided new store economics on slide 20.
For a typical smaller store format location, which is about 12500 square feet.
Our assumed cash investment inclusive of capital and inventory is approximately $3 million with no assumptions for landlord incentives.
For the first year, we expect a new store to generate approximately $5 million in revenue or about $400 per square foot.
In addition, we are targeting a first year four wall EBITDA margin of 20%, resulting in a payback period of approximately two and a half years.
As we entered this growth stage, we expect to increase our capital expenditures from recent years and have provided a breakdown of spending on slide 21.
In general we expect to spend five 5% to 6% of our consolidated annual sales on capital expenditures with approximately 55% on new store openings, 25% on technology.
10% on supply chain infrastructure, and 10% on maintenance related capex.
We expect the previously mentioned new distribution center and additional two manufacturing facilities will cost an estimated $40 million and is included in the supply chain infrastructure assumptions just mentioned.
Now before I close I want to reiterate our confidence in the ability to deliver against these objectives. We believe we are well positioned due to the great foundational work, we have completed and the progress, we're making against our strategic pillars to deliver growth and value to all stakeholders.
This concludes our prepared remarks, I'll now turn it over to the operator to begin the Q&A session.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two to remove your question from the queue for participants using speaker equipment. It may be necessary for you to.
Pick up your handset before pressing the star keys, one moment, while we poll for questions but.
First question comes from the line of Ryan Meyers with Lake Street Capital Markets. You May proceed with your question.
Hey, good afternoon, guys. Thank you for taking my questions.
First one for me I was wondering if you could just comment on the store growth cadence as we exit 2022 and kind of the best way to think about that.
Yeah, Ryan Hey, its Jeff.
Thanks for the question as we think about our store growth. We've got the as you mentioned, we have the two stores planned for fiscal 2022.
And.
Right now the best way, we can describe it there will be a ramp up to a.
Kind of a peak amount of growth on an annualized basis, but the way I like to I'd like to think about it as we're ramping up through 'twenty three 'twenty four and the first three years from 2022 to 2024, we're going to do about one third of the 76 stores.
Okay that makes sense.
And then you kind of alluded to this on the call, but I was wondering if you could just sort of unpack the 2022 guidance and how this is reflective of kind of the current macro environment that we're seeing right now and if theres any sort of improvement out there, whether it's supply chain or inflation, we could potentially see some sort of upside, especially on the profitability side.
Sure Hey, Brian I'll take the first part and then let Jeff weigh in as well.
Here's what I would say first of all I was really proud of the fact that we actually delivered a positive comp plus two 9% over L. Y in Q4, when you exclude the 53rd week and we haven't really seen a pull back from our customers as we think about purchase patterns from Q4 into Q1, hence the guidance in Q1.
<unk> made a mid single digit comps.
We continue to see great strength in our custom closet business, and particularly with Alpha and Vera. We also see great continued growth in key general merchandise categories like kitchen office bat even travel.
And we're definitely seeing great engagement with our new loyalty program and we had almost 40000 members increase their chair I E move up a tear steps here.
In the month of April alone. So we feel really confident that we've got the right strategies in place to continue to engage with our customers and we've seen in the past that you know al.
Higher income customers generally cut back later than most customers and typically are the first to spend again based on what we're seeing so far I'm feeling really good about our Q1 guidance.
And when you look at it for the full fiscal year, we are just approaching the full fiscal year in a prudent manner.
While city says we are seeing good strength in both big large categories.
Closets, and our general merchandize.
As we kind of look through the full year, we're gaining that through average ticket and.
The consumer is certainly still wanting to buy they're coming into the stores.
And we.
We feel like as we look throughout the full year, it's not really while we're there is gross margin pressure for the full year.
Not as much as the SG&A expected deleverage, but.
At the end of the day, we will be able to deliver just slightly.
Digit.
Single digit operating margins compared to fiscal 'twenty, one and the other thing I would say is that when you look at the comparison to 'twenty. One we implemented we think about that.
Supply chain pressure, the inflationary pressures of commodity pressure.
We took a.
Actions early in fiscal 'twenty, one and Qs, one and two and our gross margins reflect that and so that's why when we think about Q1 gross margins being where they are.
Being the primary headwind to our Q1 guidance, it's really looking back at a Q1 and fiscal 'twenty. One when we had some of the strongest gross margins we had seen in a while and those were just because we were anticipating the inflationary pressures that we are seeing in Q3s for and expecting again in Q1.
And throughout the fiscal year.
So you know it.
At this point in fiscal 2022, while it's about slightly less than what we achieved in 'twenty. One we outperformed in 'twenty, one and I think 'twenty two is a solid foundation for our path to $2 billion.
Cheating that by 2027.
Great. That's helpful. And then just one more for me and I'll pass it on so now that you've had the closet work acquisition here for a few months how is that business tracked relative to your guys expectations.
And are you still seeing some pretty significant synergies there. Thanks.
Yes, we are we're still integrating the closet works into him into the company quite frankly.
As I mentioned in the prepared remarks, we're rolling out the Preston collection to our stores, which will be completed by the end of July we've got about a third of the stores that now has the Preston collection in at this point in time. So it's still early to determine you know.
Sales from that line since we've just putting it in there but based on the orders that we have in the system.
It seems extremely promising obviously the acquisition with closet works.
A game changer for us because in the industry, we're able to now offer our customers both a metal based system with alpha and of airline and now a wood based system, that's highly customizable and allows us to get into spaces of the home that we weren't able to get into so.
So we feel very confident about our abilities to bring.
The new Preston collection line add for our customers.
With great finishes and obviously the 360 spinner that we're able to bring to our customers and I'm sure that they're going to love as well as Murphy beds and a whole slew of other options that we just never had before.
Got it thanks for taking my question guys.
You got it.
Our next question comes from the line of Kate Mcshane with Goldman Sachs. You May proceed with your question.
Hi, good afternoon, thanks for taking our question.
My first question centers around market share I know, that's a big opportunity that.
You're looking to benefit from over the next few years is there a way to quantify the market share. Maybe you gained this year and how much you are assuming in terms of market share gains are in your fiscal 'twenty two guidance.
Yeah, Hi, Kate Thanks for the question.
I'd break it in this way the the 20 billion plus addressable market is inclusive of the $6 billion custom closet market and that's how we look at it I think the great opportunity, we absolutely have opportunity in both.
The general merchandise side, but the greater opportunity. We believe is in the custom closet.
6 billion addressable market in particular in spaces over $2000 and as I mentioned before on previous calls, we do really well selling spaces under $2000. We've got our Elfa classic style grab and go and even elfa decor that kind of plays beta.
Wayne under 2000 and above 2000, those are work horses for us, but as we look at the overall 6 billion market. The lion's share of that market is in the above 2000 dollar spaces and hence why we have been spending a great part of fiscal 'twenty, one and how our future plans.
2 billion is centered around growing in that premium space, where we can really command a lot of market share that we don't have today.
It's why we've been getting comfortable selling premium spaces, while we'll be focusing on a vera which as you know does anywhere from six to $8000 per space, we more than doubled our sales in 'twenty, one compared to 20.
We've really invested in our design specialists as well, where we've got at least half of them now doing a million dollars.
And hence our acquisition we closet work. So we can really expand into the wood based premium side of things with the Preston collection.
So that that's why we feel really comfortable and excited about the potential market share gains with quite a bit of it coming out of the custom closet space in the above 2000 per space category.
Thank you.
Okay.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad, one moment, while we poll for questions.
Our next question comes from the line of Chris <unk> with J P. Morgan you May proceed with your question.
Thanks, Good evening guide guys first a follow up question similar to the store cadence earlier can you talk about the cadence of the low double digit earnings growth algorithm. So sure. We should we shape that similar to the store growth like how did it occurs over time or will it be.
Something different given that you'll have those upfront expenses for the stores as well as the open opening of you know a couple of distribution centers.
Yeah, Chris you know as I think about when we think about our path over the next six years.
While we're projecting high single digit operating margins at the end of 2022, we do expect to get slight leverage over the years on our operating margin on our SG&A I'm sorry.
Sure.
Throughout the years and.
Which would allow us to achieve low double digit operating margins throughout that time period I will say there is some investment that's why I say slight deleverage over the years as we ramp up for the additional manufacturing facilities and then and then the third D C.
At the end of the period so.
Yeah.
I think most of it.
Any real leverage comes at the end of that time period, but just due to the investments that we're making as we ramp up for for the new stores.
So just to try to put a finer point on that I guess as you look at because this seems to be a bit of a reset year.
Your base or are you, saying that that.
Like you know the the.
The earnings growth, you'll have low double digit annual sales growth rate and then youre going to have margins expanding from 22 to 27.
So I guess, how does that shape out from an earnings growth rate perspective is it going to be X 22, looking beyond 'twenty. Two is it is it sort of like earnings growth.
Low mid single digit early and then strong double digit later.
Well I think what we've said as you know.
Our operating profits will will double by the end of 'twenty seven.
And from a cadence standpoint.
It's it's.
Light leverage for each year as we move throughout that time period.
Slight leverage right and then the and then the unit growth is accelerating in the first three years basically 'twenty three 'twenty four 'twenty five.
It's ramping.
Yes.
And then as you think about the gross margin outlook for Europe .
For this year and then the first quarter I appreciate that there are a lot of freight and fuel and commodity costs that you're absorbing there.
I guess, how are you thinking about the ability to price and pass that through and continue to optimize promotions. So maybe if you could.
It goes separately do you think that your pricing power in the market is is is is consistent and not changing based on the momentum that you're talking about and then from a.
Promotional optimization perspective, do you still see opportunity to make progress on that front.
Yeah, we made a lot of changes in fiscal 'twenty, one as it relates to our promotional strategy and felt like we had great success I think the financial results reflect at all the while we did take pricing changes in fiscal 'twenty, one, which I mentioned earlier.
And we did while we see some unit.
The slowdown we're making it up in average ticket and the consumer is still still buying the product and we're able to generate growth and we look forward to 'twenty. Two we're keeping our eye on continued inflationary pressures just like every other retailer.
And we'll make those decisions accordingly, with an eye on the fact that we've got to maintain our competitive.
Offering for our consumers.
And we've been successful in last in the last year and we believe we believe we will be able to continue to be successful going forward.
Hey, Chris This is to teach just add a few more points to what Jeff mentioned.
You know the other factors that we have in our toolbox, obviously is the loyalty program.
It does encourage customers to spend more and save more and so that does provide some opportunities while we look to increase some prices, but for consumers to actually.
Get greater value from their purchases by engaging in that loyalty program as well as continuing to increase and expand our private label offering.
And our custom closet business, which now the fact that we own.
The wood side of the business does allow us to both benefit from the retail and manufacturing margins as they as we have with our metal based system. So.
We've got a many elements that allow us to help protect maintained gross margin.
Numbers that we have and will deploy as we kind of see fit.
Understood. Thank you.
Alright.
Yes.
Ladies and gentlemen, we have reached the end of today's question and answer session I'd like to turn this call back over to management for closing remarks.
Well, great well. Thank you again for joining us today and have a great night.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and enjoy the rest of your day.
Right.
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Hi.
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