Q1 2024 The Container Store Group Inc Earnings Call
Yeah.
Greetings and welcome to the container store first quarter 2023 earnings call. At this time, all participants are in a listen only mode.
A brief 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.
As a reminder, this conference is being recorded it is now my pleasure to.
Did you see a host Caitlin Churchill. Thank you you may begin.
Good afternoon, everyone and thanks for joining us today for the container stores first quarter fiscal year 2023 earnings results Conference call.
Speaking today are the teach my whole chair, Chief Executive Officer, and Jeff Miller, Chief Financial Officer. After a patient you have made their formal remarks, we will open the call to questions.
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 container stores press release issued today and in our annual report on Form 10-K filed with the SEC on May 26, 2023 as updated by our quarterly reports on Form 10-Q, and other public filings with the U S Securities and exchange.
<unk> Commission.
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 their forward looking statements.
Finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call.
A reconciliation schedule of the non-GAAP financial measures to the most directly comparable GAAP measures 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'll now turn the call over to cities.
Thank you Caitlin and thank you all for joining our call today.
I will begin today's discussion by reviewing highlights from our first quarter performance.
Jeff will then discuss the details of our first quarter financial results.
Followed by our outlook after which we'll open up the call to questions.
As we discussed on our year end call in May we entered fiscal 2023 with the expectation that the macro environment would remain challenging.
While we cannot control the impact it has on our customers and their spending we can control our focus.
And our focus remains steadfast on our strategic priorities of deepening our relationship with customers.
Handing out reach and strengthening our capabilities.
We believe this relentless focus and disciplined cost management will enable us to advance our long term goal of $2 billion in annual sales.
While we implemented the cost cutting action plans shared on our year end call. Our cost actions have not kept us from delivering an exceptional customer experience.
In Q1, we delivered a record high store NPS of 81.
For the first quarter, we delivered topline sales performance in line with our expectations, although fueled by increased promotional activity from our test and learn approach as we continue to focus on deepening our relationship with customers.
These tests unlocked key learnings that will inform our go forward promotional plans and better position us to deliver on our objectives for this year.
We believe when we provide customers with a reason to shop with us they will.
Therefore, we tested promotions in the first quarter with various durations and offer types.
We saw better results when we created a sense of urgency for the customer.
For example, we ran a six day buy one get 150% off offer now performed better on a per day basis than a 14 day offer.
Another example of giving our customers a reason to shop is the ongoing effort, we have put into infusing newness and innovation across our assortment.
In light of our customers traveling this summer, we gave new life to our travel and on the go category with brands like Calpac ranged in Thule.
These products are both functional with a fresh aesthetic and include carry on luggage duffel bags laptop backpacks and belt bags, all of which are exceeding expectations.
To note we are pleased to see that new products are bringing new customers.
One new customers to the container store accounted for 24% of new product sale.
And we will continue to focus on categories like travel with potential for growth.
College was another area, we identified with growth potential.
Annual College campaign kicked off in stores and online in Q1 with a re imagined and expanded product assortment alongside our partnership with online dorm decor destination Domo Fi.
While still early in the back to school season College sales are off to a strong start as a result of the enhancements we have made this year.
We also launched our online drop ship program with DOUMA Fi and several other vendor partners, which is exceeding expectations.
Q2, we expect to introduce sought after brands that will enhance our cortisol meant like socially conscious Homegoods company the citizenry.
Artisans crafty products are part of the anticipated 1000, new skus come into the container store throughout fiscal 2023.
We plan to embark on a bold evergreen campaign. This fall to showcase our product innovation and newness and drive awareness of how our curated innovative and solution oriented products can help transform our lives.
While we are pleased with the results we're seeing in response to the newness, we are delivering incremental sales are more than offset by greater than expected declines in the home edit and Marie Kondo collections.
And to a lesser extent declines in the closet storage category, driven by drop Brown shoe box and jewelry.
We believe these greater than expected declines in our more traditional categories are symptomatic of the current macro environment.
With respect to expanding our reach while we have seen softness in our non premium spaces. We continue to be pleased with that premium space results within custom spaces.
Given the strength, we continue to see in the press in line. We are looking forward to introducing more innovation in the assortment by offering superior European lighting compatible with smart homes as well as diamond, we've matched door and says that peer beautifully with new Preston colors.
We believe these innovative enhancements will elevate the Preston line even further.
Regarding cotton based services, we had 133 in home design specialist who has successfully completed a multi day in person technical design training to enhance their skills and product knowledge.
These design specialists are primarily focused on selling of avera and Preston premium spaces.
Which as a reminder represents a significant majority of the $6 billion custom space market.
In Q1 premium spaces sold by in home design specialist accounted for 80% of all the Vera and Preston sales compared to 71% in the same quarter last year and 75% in the previous quarter.
As we previously shared our custom garage offering is an area of opportunity we identified to expand.
We are rolling out a premium Preston garage solutions to stores and we're excited to announce the all new garage plus by Alpha, which we plan to launch later this year.
Informed by customer feedback on our current Elfa classic garage garage options, we develop new features and enhancements including closed cabinet.
Lighting full extension and soft closed the draws and a freestanding workbench.
These enhancements will truly elevate our overall garage offering.
New online tools continue to elevate and differentiate accustomed space experience, we soft launched the my custom spaces portal to give customers a centralized spot to review their design signed the purchase agreement manage their payment and track the status of the customer space life.
Cycle from inspiration to installation.
This portal will provide our customers with a smooth and intuitive experience.
In addition, we recently launched an enhanced online scheduler for customers to easily make in store in home well virtual design appointment on a website when they are ready to get started on a space design.
As it relates to customer satisfaction of our custom spaces category. Our net promoter score increased by nine points from Q4 of 2020 to 279.
The confidence that our continued focus on innovation and service is making an impact.
Turning next to our new store plan.
We remain on track to open six new small format stores in fiscal 2023, and still see a pathway to significantly increase our store count over the coming years.
This year's new stores will open in existing key market, where we see white space.
This fall, we expect to open in San Mateo, California.
Lynn Hills, California, and Princeton, New Jersey, followed by Gettysburg, Maryland, This winter and Miami, Florida, and Huntington, New York in spring of 2024.
And finally, as we continue to strengthen our capabilities and proud of the publication of our second annual sustainability report in Q1, which outlines the progress we have continued to make against our environmental social and governance strategy throughout fiscal 2022.
One highlights I want to note is being recognized by the United States Environmental Protection Agency for our company's use of wind Green power.
Our teams are also hard at work with a new partner that will help us measure our scope three emissions, which include indirect greenhouse gas emissions of our supply chain.
We are one of the first retailers to embark on this assessment we.
Look forward to learning the ways in which we can further reduce our carbon footprint.
To summarize as we anticipated it was a difficult start to a challenging year.
We have revised our outlook to reflect current trends in the business that.
Now we are saying in Q2.
The backdrop, notwithstanding we remain focused yet agile on the customer experience in executing against our strategic initiatives to position the container store for long term profitable growth on a path to 2 billion in annual revenue.
I want to thank all of our team for.
Their unrelenting hard work and optimism as we navigate this dynamic environment I am confident that the steps we are taking today position us well to capitalize on the recovery in demand when it occurs.
I'll now hand, it over to Jack.
Jeff.
Thank you city and good afternoon, everyone.
<unk> reviewed our first quarter topline performance was in line with our expectations.
However, our bottom line results were negatively impacted by our test and learn promotional activity as we continue to experiment with different events to engage with customers in the current environment.
And to a lesser extent, a lower than expected effective tax rate.
Offsetting some of this pressure however was an ongoing commitment to disciplined expense management include.
Including the planned actions, we discussed on our last call.
For the first quarter consolidated net sales decreased 21, 1% year over year to $207 1 million.
By segment net sales for the container store retail business for $195 1 million.
A 29% decrease compared to $246 8 million last year.
The decrease is inclusive of a comp store sales decrease of 19, 9% driven.
Driven primarily by the 25% decline in our general merchandise categories.
Which negatively impacted comp store sales by 13 160 basis points.
Customer space as comp store sales declined 18, 6% compared to last year and negatively impacted comp store sales by 630 basis points.
The discontinuation of <unk> studio third party sales year over year, partially offset by the sales from new stores made up the remaining 100 basis points to the total 29% Gcs net sales decline year over year.
For the first quarter fiscal 2023, our online channel decreased 15, 8% year over year.
And our website generated sales, which includes curbside pickup decreased 10, 5% compared to last year.
Website generated sales represented a total of 24, 1% of Tcs net sales in Q1 compared to 21, 3% in Q1 last year.
Unearned revenue decreased to $17 million in Q1, this year versus $24 7 million last year.
But driven by the pullback in customer spending that we are experiencing.
Elfa third party net sales of $12 million decreased 24, 4% compared to the first quarter of fiscal 2022.
Excluding the impact of foreign currency translation Elfa third party net sales decreased 19, 2% year over year, primarily due to a decline in sales in the Nordic markets. The.
The decline in Elfa third party sales reflects the continued challenging macro economic environment, and the Nordic and other regions due to high inflation and increasing interest rates.
From a profitability standpoint.
Our consolidated gross margin for Q1 decreased 180 basis points to 55, 3% compared to 57, 1% last year.
By segment Tcs gross margin decreased 230 basis points compared to last year, primarily due to more promotional discounting driven by the test and learn activity previously discussed higher mix of online sales and associated shipping costs and an unfavorable shift in product and services mix all of which were.
Partially offset by decreased freight costs.
Elfa gross margin decreased 420 basis points compared to last year, primarily due to a higher due to higher direct material costs.
Consolidated SG&A dollars decreased $10 5 million or eight 6%.
$111 4 million compared to $121 9 million in Q1 last year.
As a percentage of net sales SG&A increased 740 basis points year over year to 53, 8%.
The increase is primarily due to the deleverage of occupancy compensation and benefits and other fixed costs on lower sales, partially offset by decreased marketing costs.
We recorded $2 5 million of severance expense in Q1 this year associated with the previously announced reduction in force at our support Center store and distribution Center operations.
Net interest expense in the first quarter of fiscal 2023 increased to $5 million compared to $3 2 million last year.
Year over year increase is primarily due to a higher interest rate on our term loan b.
The effective tax rate for the quarter was 23, 3% compared to 28, 8% in the first quarter last year. The decrease in the effective tax rate was primarily related to the impact of discrete items on a pre tax loss in the first quarter of fiscal 2023 as compared to pretax income in the first quarter of fiscal <unk>.
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Net loss for the quarter on a GAAP basis was $11 8 million or 24 cents per share as compared to a GAAP net income of $10 5 million or 21 cents per diluted share in the first quarter last year.
Adjusted net loss was $10 1 million or 21 cents per share as compared to last year's adjusted net income of $10 5 million or <unk> 21 per diluted share.
Our adjusted EBITDA decreased to $2 9 million in the first quarter this year compared to $28 2 million in Q1 last year.
Turning to our balance sheet, we ended the quarter with $12 2 million in cash $185 4 million and total debt and total liquidity, including availability on our revolving credit facilities of $94 $2 million.
Our current leverage ratio is one nine times.
We ended the quarter with consolidated inventory down 10, 6% compared to the first quarter last year. The decline is the result of lower freight costs and inventory year over year as well as our prudent actions to reduce inventory purchases given the pullback in customer spending we are experiencing and expect to continue to see given the.
Challenging macro environment.
Capital expenditures were $8 9 million in the first quarter of fiscal 2023.
$17 6 million in Q1 of fiscal 2022, which reflects the planned pullback of capital spending in fiscal 2023.
We are continuing to invest primarily in our stores and technology free.
Free cash flow in the first quarter. This year was a use of $11 8 million versus a use of $14 4 million in Q1 last year.
Now for our outlook.
For the second quarter of fiscal 2023, we expect consolidated net sales to be approximately $205 million to $215 million.
Driven primarily by a comparable store sales decline in the low to mid 20% range we expected.
Decline in comparable store sales is reflective of a slower than expected start to the second quarter in terms of customer traffic and average ticket.
They expected consolidated revenue declines were also inclusive of 180 basis point impact for the strategic discontinuation of our <unk> studio third party sales and continued Elfa third party sales headwinds new store sales are expected to partially offset the impact of these headwinds.
We expect adjusted net loss per share in the second quarter to be in the range of 10.
Two zero sets.
The implied year over year operating margin decline for the second quarter is expected to be more than entirely driven by SG&A due to fixed cost deleverage on lower sales.
From a gross margin perspective favorable product mix and freight are expected to be moderate tailwind to gross margin in the second quarter.
Interest expense for the second quarter is expected to be approximately $5 1 million driven by higher interest rates.
We expect income tax expense in the range of 1 million to 500000, primarily driven by discrete tax items in the second quarter.
As a result of these discrete items.
Our effective tax rate is expected to be the range of negative 20% to positive 75%.
With respect to fiscal 2023, given our first quarter performance and expectation for the second quarter. We now expect consolidated net sales in the range of $875 million to $890 million driven primarily by comparable store sales declines.
High teen percent range.
We continue to expect less significant declines in the comparable store sales in the second half of the fiscal year driven by our planned cadence of new product introductions planned campaign cadence and the easing comp comparisons from the prior year.
This outlook also assumes a 70 basis point benefit related to the impact of new stores inclusive of a partial offset due to the strategic discontinuation of our <unk> studio third party sales and continued Elfa third party sales headwinds.
From a gross margin perspective favorable product mix and freight are expected to be moderate tailwind to gross margin in fiscal 2023, partially offset by increased promotional activity.
Our outlook, therefore assumes gross profit range of $515 million to $525 million.
As a result of the payroll related workforce reduction actions, we took in the first quarter, along with a proactive effort to reduce marketing and other costs. Our goal is to keep our SG&A expense as a percent of sales at approximately 50% for the full fiscal year.
These actions are expected to reduce overall SG&A expense by approximately $10 million per quarter compared to last year with the fourth quarter total dollar savings being slightly higher.
For the full fiscal year total SG&A reductions are expected to be almost $45 million when compared to last year.
Our outlook assumes operating margins of approximately two 5% to three 1% or $22 million to $28 million and operating profit inter.
Interest expense for fiscal 2023 is expected to be approximately $20 million driven by higher interest rates our.
Our effective tax rate is expected to be in the range of 300% to 115%.
During an approximate $5 6 million of discrete income tax expense is expected to be recorded in the third quarter of fiscal 2023. This discrete tax expense is related to the expiration of certain stock options granted in connection with our initial public offering in 2013.
We expect net loss per share in fiscal 2023 to be in the range of 10.
Two zero cents.
After adjusting for the estimated $2 5 million of severance expense previously mentioned as well as the aforementioned $5 6 million <unk>.
Discrete tax income expense, we expect adjusted net income per diluted share to be in the range of <unk> to.
To 15.
Capital expenditures are still expected to be approximately $45 million to $50 million and with this outlook, we still aim to be free cash flow positive in fiscal 2023.
Almost half of our planned capital expenditures are related to new stores planned to be opened in fiscal 2023 or in fiscal 2024. We are planning to open six new stores, primarily in the second half of fiscal 2023 and three stores in fiscal 2024.
The remaining capital is related to investment in E Commerce technology infrastructure and software projects and to a lesser extent maintenance.
This concludes our prepared remarks, I'll now turn it over to the operator to begin the Q&A session.
Thank you.
We will now be conducting a question and answer session.
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One moment, please while we poll for questions.
Yeah.
Our first question is from Steven Forbes with Guggenheim Securities. Please proceed.
Good evening Suffusion, Jeff.
Well.
I wanted to start with the learnings around promotional activity that you mentioned during the quarter.
Just curious if you can maybe expand on.
What you did in.
Terms of breadth and depth during the quarter.
And whether you were satisfied or unsatisfied with the customer response.
Just trying to get a better understanding of what you are sort of planning for the back half year, because it doesn't seem like you're planning.
To experience.
Pressure on the gross margin profile of the business in the back half.
Yeah, Hey, Steve This is <unk>. Thanks for the question.
Because I said in our prepared remarks, why we delivered sales in Q1 in line with our expectations. There were definitely some key takeaways for the quarter. That's worth pointing out one is around promotions, we found that the right promotion can drive profitable results.
As we stated we experimented with different promotional levers both in duration and percentage off to learn essentially what it would take to engage our customers given the current economic environment of higher interest rates, while still driving profitable results. So.
So we had much better sales and more profitable success.
In short our campaigns that drove a sense of urgency than longer campaigns, and bogo did much better than a straight percentage off.
So we learned a great deal that will inform our go forward promotional plans in terms of what it will take to engage our customers. It's also worth noting that the promotions actually serve to help offset any.
Any resistance to current pricing and to bring storage and organization top of mind for customers, especially given everything that they're dealing with.
I think also worthy to point out.
Is outside of promotions that newness is really working for us as I mentioned before we're seeing.
Positive results from the introduction of home fragrances and plant based cleaners, which actually grew 10% collectively this quarter over the prior quarter.
Sales from our refresh travel assortment and re imagine back to college assortment and a new drop ship program are also all doing very well and bringing in new customers. So that was really important learning for us as we look to win with our customers is what's the right cadence it makes for promotions what.
What are they really engaging with as it relates to newness.
I think another big learning that we found in Q1 worthy of pointing out as well is.
The additional challenges that we're facing with some of our traditional storage and organization categories, and we're definitely seeing more than expected declines with the home edit the Marie Kondo and to a lesser extent declines in their closet storage.
Category, but I think again that's all.
Really a function of the current macro environment.
And then just to conclude with what we kind of learned during Q1, a very kind of pleased to see the performance out of our premium custom spaces in particular, a very impressed then.
<unk> doing quite well with operation sales positive Q1 of last year, which is why we're so excited about the innovation coming out of our pressed in line with our new European lining compatible with smart homes, and our new mesh door inserts.
And to Tee it off like you know very pleased with our ability even in this environment to deliver exceptional customer service.
So when customers do come in we're able to work hard with them to convert them and also deliver it really strong NPS scores 81 for store 79 for custom spaces. So all of that kind of I think bodes well in terms of when customers come in where we are able to deliver on our best foot forward.
<unk>.
Thank you so as you age of a follow up on that because I'm, just trying to better contextualize.
Frame the second quarter guidance with the full year second half guidance.
It almost seems like you're sort of calling for or guidance for an inflection and I know compares get easier. But then you got these sort of learnings right around promotional activity you have newness strike.
You have the holiday time period.
And so is that the key message right around sort of the second half outlook is that the inflection.
Is becoming more visible whether it's macro related but also strategic priority driven.
Yeah. So I would believe you categorize it correct and I'll, let Jeff add a little bit more what I would say is.
As you think of particularly in Q2, we definitely saw some softness in July and primarily probably due to peak travel season. So we thought it was prudent just kind of revise our guidance relative to that but having said that we've got a ton of new exciting products coming to fruition like we talked about with citizenry was a had behalf.
AUM, that's launching is an ethically sourced home goods from around the world.
That we think will really bode well with our customers plus we have something really special plan for our customers to celebrate the 75th anniversary of Alpha.
And so that that's one of the reasons, we were a bit prudent respect to our Q2 guide and as it relates to the back half as you characterized it quite well we do have some easier compares as you think about what happened last year, and then with all the newness and excitement that we have planned.
Thank you Paul.
Great. Thank you.
Thank you.
Next question is from Ryan Meyers with Lake Street Capital. Please proceed.
Yeah, Hi, guys. Thanks for taking my question first one for me just kind of curious if you could comment on and highlight how some of the newer stores are performing.
Yeah, Hi, Ryan how are you.
I'm doing well thank you.
Good.
Look relative to our new stores, what I would say is we.
We continue to attract new customers. The three new stores that we've opened we see over 60% of customers shopping us are new we also see a higher degree of penetration as it relates to our custom spaces almost at 37%.
And our NPS score across all of them actually are in the high eight a mid eighties, rather at around 80 384. So we are seeing great consumer response to the new doors that were opening now having said that you know.
They are still.
Deal Engle contending with the current macro on client at climate, they're not immune to that.
But we are generally pleased with what we are seeing across those three stores.
As you know, we've got six new stores still planned.
For fiscal 'twenty, three and some really great locations.
Half of them are actually built to suit locations. So that really means it helps us on the Capex front and we are still very much committed to new store growth expansion and believe we still have a tremendous amount of white space given the current economic climate.
However.
As we stated many times before we will be smart around the doors that we opened in particularly ensuring that we keep to our goal of generating positive free cash flow.
And we may moderate plans accordingly based on that.
Great that sounds good just one question from me. Thank you.
Okay, great. Thank you.
Thank you. Our next question is from Kate Mcshane with Goldman Sachs. Please proceed.
Hi, Thanks for taking our question we were wondering if.
If you had a view on how much of what Youre seeing is macro versus.
<unk> of dollars by the consumer as they focus potentially on travel and services. It also seems like premium is maybe holding up better than non premium both in the custom spaces and in the store. So we're wondering if you could talk to that a little bit more as well.
Yes, hi, Thank you it's a great question.
And definitely we're seeing as I stated.
Some resistance as it.
It relates to our ability to win on premium spaces, we are able to contain with the customer and excite them. They are committed to those purchases and we do well there.
Non premium spaces are seeing a softness in particular with alpha although I would say the last few days, we've actually seen elements of it starting to improve but it's still too early to tell.
I think largely as we look at our consumers.
We are very much distracted either with travel that's going on right now or with interest rates and are obviously, continuing with the level of uncertainty right now in the things.
Start to normalize we do expect a return back and that's what we are getting geared up for and excited about given all the new units that we are introducing for the back half.
Okay. Thank you and then a follow up question was just on inventory I know, Jeff noted what was down in the quarter and the 10% range.
I wondered if you could parse out what it was down on a unit basis or a by store basis, and where youre guiding where inventory should be by the end of the year.
Yes. This is <unk>.
Jeff.
Thanks for the question on inventories inventories down as I stated in the call.
A little over 10% and that's really been driven by freight.
From a unit basis perspective, it's relatively flat.
So as.
As we continue to move through the year, we expect.
Freight costs to continue to average down.
But right now our current inventory projections are to be down just on a year over year basis. As a result of the freight cost savings that we're seeing.
Okay. Thank you if I could sneak just one more question.
I don't think you mentioned too much about the loyalty program in your prepared comments.
Just wondering if maybe leaned into that this quarter at all with some of the data or anything else to help you with your sales in line with expectations for Q1.
Sure Hi, Kate Yes, we did not mention anything in our prepared remarks, but I will tell you that our loyalty program still continues to do well relative to how we have talked about it historically and we see a little T baskets still be incredibly higher than that no non loyalty baskets that are up almost 50%.
And we see our experts still spending four times more than our entry level enthusiasts.
And so again as we've stated on prior calls and its a great level of data that we're able to get out of our loyalty program. We are then able to mine that data and to really understand how best to bring customers along in the journey to get them from one category for example, kitchen into another category, which could be storage.
And then the third category, which could be into custom spaces. So all of that great work is commencing here at the container store and are still very proud of the of how our loyalty program is performing.
Thank you.
Thank you.
As there are no further questions. This concludes today's teleconference. Thank you for your participation you may now disconnect your lines.
Okay.
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