Q2 2023 The Container Store Group Inc Earnings Call
Greetings and welcome to the container store second quarter 2023 earnings call. At this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
A reminder, this conference is being recorded.
It is now my pleasure to introduce your host Caitlin Churchill of Investor Relations. Thank.
Thank you you may begin.
Good afternoon, everyone and thanks for joining us today for the container stores second quarter fiscal year 2023 earnings results Conference call.
Each day, our city small truck Chief Executive Officer.
Miller Chief Financial Officer. After a patient you have made their formal remarks, well 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.
Its plans and objectives for the business and the future financial performance of the company.
The risks and uncertainties.
Actual results could differ materially from those anticipated in these forward looking statements the.
The risk factors that may affect results are referred to in the container store press release issued today and in our annual report on Form 10-K filed with the FCC on May 26 2023.
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 date of this call and the container store does not undertake any obligation to update the forward looking statements.
Finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call.
A reconciliation schedule of the non-GAAP financial measures. The most directly comparable GAAP measure is also available in the container store 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 Satish.
Thank you Kate and thank you all for joining our call today I will begin today's discussion by reviewing highlights from our second quarter performance.
Jeff will then review the details of our second quarter financial results followed by our outlook.
Well then open up the call for questions.
As we discussed on our last call, we expected a challenging quarter on consumer spending impacted by long term inflationary pressures subside.
Substantially increased interest rate and overall market uncertainty.
And that is essentially what we saw a continued year over year decline in our customer traffic.
Yeah, that's being purchased by them, especially in our core and more value oriented category.
The monthly cadence of that sales decline, which deepest in July, which we primarily attribute to customer distraction with summer travel.
Those declines did slightly moderate.
In September.
Additionally, we benefited from the earlier than planned start about 75th anniversary event, which assisted us in delivering sales and adjusted EPS.
The high end of our expectation.
However, as we look to the second half of the fiscal year.
We had slightly lower revenue expectations.
And we now expect to be contending with challenges in gross profit driven by sales mix and SG&A expense at all.
All of which are driving changes to our full year outlook, which Jeff will go over shortly.
Yeah.
So Q2 overall consolidated net sales were $219 $7 million down 19, 4% compared to the prior year period with $272 7 million.
From a profitability standpoint, we delivered gross margin expansion.
Driven primarily by freight tailwind and shorter run general merchandise promotions, which was the loonie, we took away from our Q1 tax.
The gross margin expansion, partially offset the significant.
<unk> SG&A de leverage leading to adjusted income per share of 1%.
This was above the high end of that expectation and driven by the execution of our SG&A reduction plan.
The sales headwinds notwithstanding.
I am pleased with how our organization has remained focused on executing across our strategic priority of deepening our customer relationships, expanding our reach and strengthening our capability.
We are aiming to position ourselves for outsized share gains when the market normalizes.
Let me now provide some key highlights on our most notable accomplishments in Q2.
As it relates to start Barry anything customer survey.
We are proud to receive high Mark, but I think in this area.
Outdoor net promoter score remained strong at 81 for the second quarter.
This call is a testament to the dedicated efforts the backdoor, especially.
Their expertise extending from conducting educational demonstration of our new premium products to providing exceptional service and specialized knowledge in their respective areas.
Our organized insider loyalty program remains a key to deepening our customer relationships with the average ticket more than 45% higher than non loyalty members.
Oh, hi, loyalty tier members are spending five times more than I do get members.
In Q2, we enhanced the journey of our insiders, who ongoing storytelling.
Now when a customer joins the program they receive engaging in educational communication about our organizing solution custom spaces and in home service to ensure they understand all that we have to offer them in their transformational journey with us.
On the product front, we continue to enrich our assortment with more premium and upscale items.
Which we believe not only drove new customers to shop with us.
But was also positively received by existing customers as well.
In fact, we spent customer interest that validated that our new premium products and giving customers more reasons to shop with us.
And that they see the container store as a one stop shop for.
Both the organizational and home beautification need.
For example, we saw great success with our back to college campaign, which gives us the opportunity to engage with you and existing customers.
During an important milestone in each year.
To recap our 2023 up at <unk>.
He ran out and your colleagues are aware of college parents. The college students could sign up to receive 25% off their purchases.
They did a complete and compelling coffee shop with each of our categories in stores and online.
Activated pop up shops, and 36 College campus bookstores nationwide.
Our colleague Alpha brought in 35% new customers.
A 68% increase in sign ups.
And drove a 43% increase in sales compared to last year.
From a feed under bad storage multi directional we'd be fine to an innovative three though trucking caught from domo pie. We attribute the campaign success to positioning the container store as a one stop shop for college without it has an expanded assortment.
In addition, we launched our Uncontained branding campaign during the fall product spotlight.
This campaign supports our ongoing expansion into strategic growth category that complement our core offerings, including on the go travel dining entertainment home decor textiles.
We introduced more than 400, new products across these categories in September.
Like college and other new product introduction, we have shed sales have exceeded our expectations.
We consider over 85% of the general merchandise in the introduction to be premium and includes brands like Cato, which offers original Atlantic travel category.
<unk> known for a socially conscious oddest delayed homegoods and.
And for Tesla and known for its innovative break resistant barware.
This gives us confidence in our direction I'm focused on bringing in more upscale and premiums pollution, particularly those that complement our premium customer base. It.
Though this new product is a tailwind it does come at a lower gross margin than some of our more mature and larger volume core and value oriented product category.
While we do expect to improve the margin profile of these new more premium product lines over time, we have updated our full year outlook to reflect the impact of this mix on our gross margin.
As you move into the remainder of the year customers will see more new products and seasonal assortments during key periods, giving them more reasons to shop with us.
Earlier this month, we introduced more than 1000 product like part about seasonal holiday offering supported by an in store and online holiday shop.
Digital and traditional marketing, including an elevated direct mail look book.
Approximately 80% of the adult Mendez you Hello, most ha is considered premium and 55% is limited distribution all exclusive to the container store.
We believe it is our best holiday assortment yet.
There are more gift, giving opportunity along with curated premium decor than we've ever had during this time period.
For example, customers will discover tested table arrangement and the core that complement our holiday <unk>, including a collection of artisan crafted stoneware could be home.
Additionally, customers can explore elevated gifting opportunity like exclusives, and timeless leather travel essentials kiana.
Innovative and premium pet brands like stable in hidden premium gift wrapping holiday storage essentials, and so much more.
On the safety side, we have continued to see relative strength compared to our general merchandise performance.
And our premium Vera and Preston lives, despite the challenging environment.
With interest rates as high as they are coupled with fewer homes in the market. We do believe we could benefit from customers investing in their homes more which is one of them. We think we have been very intentional without focus on strengthening our customer base is offering.
We ended the quarter with 135 in home designers who are.
Focused on selling premium spaces and drove more than 85% of premium sales in Q2.
The effort, we are putting into improving lead contact high quality. So that is reflected in our customer base is net promoter score, which continues to trend positively and increased to 81 up two points from Q1.
Additionally, we're adding an incremental investment in marketing in the second half of fiscal 2023 to support overall customer awareness and lead generation.
I previously said, we look forward to launching garage clock by Alpha in November, which bridges the gap between our entry level of the classics and premium Preston garage offering appears strategically without garage general merchandise.
With features like lighting fully enclosed wall enrolled in cabinets and a heavy duty work that we are bringing to the market police and our customers want at a competitive price.
Moving on to new stores.
We are successfully expanding our reach with an average of over 60% new customers shopping with us in these locations.
We opened up amateur California location before the end of Q2, and our new Woodland Hills, California location, just over a week ago.
We continue to be pleased with the productivity of our small format stores.
Specifically with the faster adoption of custom spaces, which is averaging 39% of sales per store.
And it's just been the net promoter score for our small format stores remain incredibly strong at 83.
Looking ahead to the remainder of the fiscal year.
We expect to open three more small format stores for a total of five.
Our previously announced Miami location will be shifting to fiscal 2024 due to construction delays.
To highlight one of our technology initiatives in Q2.
Have started testing AI generated content on a web site to create efficiency and personalize the online experience for our customers.
This concept is now automatically generated based on sophisticated pumps.
Incorporate customer reviews.
Rich vendor partner content that allows us to enhance product display pages, providing even more compelling reasons to buy a greatly improving search capabilities.
Operator: Greetings and welcome to the Container Store second 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. If any, once you require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
And finally as I've said many times our employees are the lifeblood of this company and all contribute to its long term stability and growth.
Investing in how people are recognizing their contributions are critical and remaining an employer of choice.
In Q2, we announced the reinstatement of our annual employee pay increase for eligible employees effective October 1st.
Caitlin Churchill: It is now my pleasure to introduce your host, Caitlin Churchill, of May Begin. Good afternoon, everyone, and thanks for joining us today for the Container Store's second quarter, 50th year, 2023, earnings results conference call. The key today are Satish Malhotra, Chief Executive Officer, and Jess Miller, Chief Financial Officer. After Satish and Jess 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 plans, and objectives for the business, and the future financial performance of the company that are subject to risk and uncertainties.
Like everyone. How people are contending with in place today.
Cost of living and other.
Economic pressure and we firmly believe this pay increase was the right thing to do.
We also added back some store payroll hours and our revised outlook.
Outlook now reflects the decision.
Additionally, we launched a new Rep recognition program Tcf's depreciate.
Caitlin Churchill: 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 Store's press release issue today and in our annual report on form 10K filed with the SEC on May 26, 2023, as updated by our quarterly reports on form 10Q and other public filings with the U.S. Securities and Exchange 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.
This program to facilitate peer to peer celebration to acknowledge the ways that our team members exemplify our company foundational principles every day.
Before I turn the call over to Jeff.
I want to reiterate our conviction in our strategy that we believe will serve us well and deliver share gains when containers begin prioritizing investment in their home market conditions normalize.
We have a strong balance sheet.
In place and believe we are navigating today's environment with exceptional discipline.
We further strengthened our competitive position.
With that I'll now hand, it over to Jack.
Yeah.
Thank you cities and good afternoon, everyone.
Our strategic reviews, we continue to contend with the tough macro backdrop and industry pressures that impacted our second quarter performance. However, our results did exceed our guidance ranges.
Caitlin Churchill: Finally, the speakers may refer to certain adjusted or non-gap financial measures on the call. The reconciliation schedule of the non-gap financial measures to the most directly comparable gap measures is also available in the Container Store's press release issue today.
For the second quarter.
Consolidated net sales decreased 19, 4% year over year to $219 7 million.
A copy of today's press release and investor deck may be obtained by visiting the Investor Relations page at the website at www.containerstore.com.
Hi segment net sales for the container store retail business were $285 million and 19, 8% decrease compared to $259 9 million last year.
Satish Malhotra: I will now turn the call over to the Deesh. Thank you, Caitlin, and thank you all for joining our call today. I will begin today's discussion by reviewing highlights from our second quarter performance. Jeff will then review the details of our second quarter financial results followed by our outlook.
The decrease is inclusive of the comp store sales to decrease 20% driven primarily by the 24% decline in our general merchandise categories, which negatively impacted comp store sales by 1320 basis points.
Satish Malhotra: We'll then open up the call to questions. As we discussed on our last call, we expected a challenging quarter on consumer spending impacted by long-term inflationary pressures, substantially increased interest rates, and overall market uncertainty. And that is essentially what we saw. A continued year-over-year decline in our customer traffic and fewer units being purchased by them, especially in our call and more value-oriented categories. The multiple cadence of our sales declines, which steepest in July, which we primarily attribute to customer distraction with summer travel.
Spaces comp store sales declined 19, 3% compared to last year and negatively impacted comp store sales by 680 basis points.
Sales from new stores more than offset the discontinuation of <unk> studio third party sales year over year, which benefited total tcf's net sales by 20 basis points.
For the second quarter fiscal 2023, our online channel decreased 21, 7% year over year and our website generated sales, which includes curbside pick up decreased 16, 4% compared to last year.
Website generated sales represented a total of 21, 8% of Tcs net sales in Q2 compared to 29% in Q2 last year.
Satish Malhotra: Those declines did slightly moderate in August and September. Additionally, we benefited from the earlier-than-planned start of our 75th Alpha Anniversary event, which assisted us in delivering sales and adjusted EPS above the high end of our expectations. However, as we look to the second half of the fiscal year, we have slightly lower revenue expectations, and we now expect to be contending with challenges in gross profit given by sales mix and in SGNA expenses, all of which are driving changes to our four year outlook, which Jeff will go over shortly.
Unearned revenue decreased to $18 3 million in Q2, this year versus $22 1 million last year and reflects the pullback in customer spending that we are experiencing.
Elfa third party net sales of $11 2 million decreased 12, 5% compared to the second quarter of fiscal 2022.
Excluding the impact of foreign currency translation Elfa third party net sales decreased 10, 7% year over year, primarily due to a decline in sales in the Nordic markets.
The decline in health of third party sales reflects the continued challenging macroeconomic environment and the Nordic and other regions due to higher inflation and interest rates.
Satish Malhotra: For Q2, overall consolidated net sales were $219.7 million, down 19.4% compared to the prior year period of $272.7 million. For a profitability standpoint, we delivered gross margin expansion, driven primarily by free tailwind, and shorter run general merchandise promotions, which was a learning we took away from our Q1 test. The gross margin expansion partially offset the significant expected SGNA delivery, leading to adjusted income per share of one cent. This was above the high end of our expectations, and driven by the execution of our SGNA reduction plan.
From a profitability standpoint, our consolidated gross margin for Q2 increased 100 basis points to 57, 6% compared to 56, 6% last year.
Our segment Tcs gross margin increased 10 basis points compared to last year, primarily due to lower freight costs, partially offset by unfavorable mix and increased promotional activity.
Unfavorable mix was primarily related to a shift in sales mix to lower margin general merchandise products during the quarter and the increased promotional activity was primarily related to custom spaces. Because we had an earlier than planned start of our 75th Alpha anniversary of that.
Satish Malhotra: The sales headwinds notwithstanding, I am pleased with how our organization has remained focused on executing across our strategic priority of deepening our customer relationship, explaining our reach and strengthening our capabilities. We are aiming to position ourselves for outside share games when the market normalizes.
Elfa gross margin increased 500 basis points compared to last year, primarily due to price increases.
Consolidated SG&A dollars decreased $9 4 million or seven 9% to $109 3 million compared to $118 7 million in Q2 last year.
Which reflects the cost management actions taken in the first quarter.
Satish Malhotra: Let me now provide some key highlights on our most notable accomplishments in Q2. As it relates to star experience and customer service, we are proud to receive high mock for our efforts in this area. Our store net promoter score remains strong at 81 for the second quarter. This score is a testament to the dedicated efforts of our store specialists. Their expertise extends from conducting educational demonstrations of our new premium products to providing exceptional service and specialized knowledge in their respective areas.
As a percent of net sales SG&A margin increased 620 basis points year over year to 49, 7%.
The increase is primarily due to deleverage of fixed costs associated with lower sales in the second quarter of fiscal 2023 <unk>.
Additionally, SG&A spend in Q2 last year included a $2 $6 million net benefit from a one time legal settlement.
During the quarter, we completed an impairment test of goodwill and indefinite life intangible assets and concluded there was a total noncash impairment of goodwill.
And the Tcs reporting unit and the amount of $23 4 million.
Satish Malhotra: Our organized insider loyalty program remains a key to deepening our customer relationship, with the average ticket more than 45% higher than non-loyalty members. Experts, our highest loyalty tier members, are spending five times more than our enthusiasts members. In Q2, we enhance the journey of our insiders through ongoing storytelling. Now, when our customer joins the program, they receive engaging in educational communication about our organizing solution, custom spaces and in home services to ensure they understand all that we have to offer them in their transformational journey with us.
Our net interest expense in the second quarter of fiscal 2023 increased to $5 2 million compared to $3 8 million last year. The year over year increase is primarily due to a higher interest rate on our term loan and to a lesser extent higher borrowings on our revolving credit facility during the quarter.
The effective tax rate for the quarter was negative two 6% compared to 25, 9% in the second 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 second quarter of fiscal 2023 as compared to pretax income in the second quarter.
Satish Malhotra: On the product front, we continue to enrich our assaultments with more premium and upscale items, which we believe not only grows new customers to shop with us. But was also positively received by existing customers as well. In fact, recent customer intercepts validated that our new premium products are giving customers more reason to shop with us, and that they see the Container Store as a one-stop shop for both the organizational and home beautification needs.
Fiscal 2022.
Net loss for the quarter on a GAAP basis inclusive of the $23 4 million noncash goodwill impairment charge was $23 7 million or <unk> 48 per share as compared to a GAAP net income of $15 7 million or 31 cents per diluted share in the second quarter of last year.
Sure.
Adjusted net income was 365000 or one cent per share as compared to last year's adjusted net income of $13 8 million or <unk> 27 per diluted share.
Satish Malhotra: For example, we feel great success with our Dr. College campaign, which gives us the opportunity to engage with you and existing customers during an important milestone each year. To recap our 2023 efforts, we ran out annual college offer where college parents and college students could sign up to receive 25% off-date purchases. Curated a complete and compelling college shop with new to ask categories in stores and online and activated pop-up shops in 36 college campus bookstores nationwide.
Our adjusted EBITDA decreased to $17 million in the second quarter of this year compared to $35 9 million in Q2 last year.
Satish Malhotra: Our college offer brought in 35% new customers, so a 68% increase in sign-ups and drove a 43% increase in sales compared to last year. From our pride-and-true underbed storage to multi-directional user fans to an innovative three-door charging cart from Domify, we attribute the campaign success to positioning the Container Store as a one-stop shop for college with our enhanced and expanded assessment.
Turning to our balance sheet, we ended the quarter with $10 2 million in cash $173 2 million and total debt and total liquidity.
Including availability on our revolving credit facilities.
$104 3 million.
Our current leverage ratio is two three times.
We ended the quarter with consolidated inventory down eight 8% compared to the second quarter last year. The decline is primarily the result of lower freight costs and inventory year over year.
Capital expenditures were $22 million in the first half of fiscal 2023 versus $32 million in the first half of fiscal 2022, which reflects the planned pullback in capital spending in fiscal 'twenty to 'twenty three.
We are continuing to invest primarily in our stores and technology.
Satish Malhotra: In addition, we launched our uncontained branding campaign during the four-product spotlight. This campaign supports our ongoing expansion into a studio growth categories that complement our core offerings, including on-the-go travel, dining, entertaining, home decor and textiles. We introduced more than 400 new products across these categories in September, unlike college and other new product introduction we have shared sales have exceeded our expectations. We consider over 85% of the general merchandise in this introduction to be premium and includes brands like Cadence, which offers original magnetic travel capsules.
Free cash flow in the first half of this year was a use of $1 3 million versus a use of $5 3 million in the first half of last year.
Now for our outlook.
That's the piece of literature, we have updated our outlook to reflect certain items impacting the top and bottom lines and I will discuss.
While the macro backdrop remains tough we continue to be extremely disciplined investing and inventory planning our campaigns managing expenses and allocating our capital.
Making prudent investments.
In alignment with our strategic initiatives and longer term growth plans.
The third quarter of fiscal 2023, we expect consolidated net sales to be approximately $220 million to $225 million.
Satish Malhotra: The Sydney Finnery known for its socially conscious, artisan-made homebid and for Tesla known for its innovative break-resistant ballwear. This gives us confidence in our direction and focus on bringing in more upscale and premium solutions, particularly those that complement our premium custom spaces. Though this new product is a sales tailwind, it does come at a lower gross margin than some of our more mature and larger volume core and value oriented product categories.
Given primarily by a comparable store sales decline of mid to low teens you expected.
Decline in comparable store sales is reflective of a pullback in our core and value oriented products in the third quarter compared to our previous outlook.
We expected consolidated revenue declines are inclusive of continued Elfa third party headwinds, which we expect to be more than offset by new store sales.
Satish Malhotra: While we do expect to improve the margin profile of these new more premium products lines over time, we have updated our four-year outlook to reflect the current impact of this mix on Ageless margins. As we move into the remainder of the year, customers will see more new products in seasonal apartments during key periods, giving them more reasons to shop with us. Earlier this month, we introduced more than 1000 products as part of our seasonal holiday offering supported by an in-store and online holiday shop, digital and traditional marketing, including an elevated direct mail lookbook.
We expect adjusted net loss per share in the third quarter to be in the range of eight to <unk>.
The implied year over year operating margin decline for the third quarter is expected to be more than entirely driven by SG&A, primarily due to fixed cost deleverage on lower sales.
Our SG&A spend expectations for the third quarter have increased from our previous outlook and include incremental investments and primarily store payroll pay increases and marketing.
From a gross margin perspective.
It is still expected to be a tailwind to gross margin in the third quarter in comparison to last year, partially offset by unfavorable <unk> within our general merchandize product mix.
Satish Malhotra: Approximately 80% of this installment is used, and almost half is considered premium, and 55% is limited distribution or exclusive to the containment store. We believe it is our best holiday assortment yet. There are more gift-given opportunities along with curated premium decor than with ever time during this time period. For example, customers will discover festive table arrangements and decor that complement our holiday trends, including a collection of artisan crafted stoneware from beyond. Additionally, customers can explore elevated gifting opportunities like exclusives and timeless leather travel essentials from Qana, innovative and premium pet brands like Stable and Hidden, premium gift wrapping, holiday storage essentials, and so much more.
Outlook reflects our expectation that we will continue to drive increased sales.
From a new general merchandise products.
So seeing greater pressure on our higher margin core general merchandise products.
Interest expense for the third quarter is expected to be approximately $5 3 million driven primarily by higher interest rates.
We expect income tax expense in the range of two to $2 5 million, primarily driven by discrete tax items in the third quarter.
This discrete tax expense is primarily related to the exploration of certain stock options granted in connection with our initial public offering in 2013.
As a result of these discrete items, our effective tax rate is expected to be in the range of negative 50% to negative 145%.
With respect to fiscal 2023.
Our press release outlines our current versus prior outlook. The key changes are as follows.
Satish Malhotra: On the custom spaces side, we have continued to see a relative strength compared to our general merchandise performance and resilience in our premium era and custom lines despite the challenging environment. With interest rates as high as they are, coupled with fewer homes in the market, you do believe we could benefit from customers investing in their homes more, which is one of the reasons we have been very intentional without focus on strengthening our custom spaces off-wink.
We now expect consolidated net sales in the range of $870 million to $885 million or $5 million lower than our previous outlook.
We continue to expect less significant declines in comparable store sales in the second half of the fiscal year, driven by our planned cadence of new product introductions and campaigns and the easy comp comparisons from the prior year the implied low to high teens fourth quarter comparable store sales declines are primarily related to our planned custom space camp.
Satish Malhotra: We ended the quarter with 135 in-home designers who are focused on selling premium spaces and growing more than 85% of premium sales in Q2. The effort we are putting into improving lead contact time quality service is reflected in our custom spaces net promoter score, which continues to transpositively and increase to 81, up to points from Q1. Additionally, we're adding an incremental investment in marketing in the second half of fiscal 2023 to support overall custom space awareness and lead generation.
Cadence in fiscal 2023 compared to last year.
We believe there could be more alpha product sales headwinds in the fourth quarter in comparison to the third quarter due to the pull forward of our alpha product line sales during the fiscal year.
Alpha is planned to be on promotion one more time in fiscal 2023 as compared to fiscal 2022.
We have reduced our gross margin protection by about 100 basis points for the fiscal year MBR.
Embedded in our updated gross margin projection, we believe rate will continue to be a tailwind to gross margin in fiscal 'twenty three partially offset by.
Satish Malhotra: A previously shared, we look forward to launch from launching Garage Plus by Alpha in November, which bridges the gap between our entry-level Alpha Classic and premium Preston Garage offering, appears strategically in our garage generally merchandise. With features like lighting, fully enclosed wall and rolling cabinet and a heavy-duty workbench, we are bringing to the market solutions our customers want at a competitive price. Moving on to new stores, we are successfully expanding our reach with an average of over 60% new customer shopping with us in these locations.
By increased promotional activity and mixed dynamics within the general merchandise categories.
We're seeing lower than expected sales of our higher margin core and more value oriented general merchandise products, while our new premium general merchandise product, which has lower margin has performed and is expected to perform better than originally expected.
Our outlook, therefore assumes gross profit range $504 million to $513 million.
We have revised our expectation for SG&A savings to approximately $37 million for the year versus the previously planned $45 million.
Satish Malhotra: We opened our San Mateo California location before the end of Q2, and our new Woodland Hills California location is just over a week ago. We continue to be pleased with the productivity of our small format stores, specifically with the faster adoption of custom spaces, which is average in 39% of sales per store. In addition, the net promoted score for our small format stores remained incredibly strong at 83. Looking ahead to the remainder of the fiscal year, we expect to open three more small format stores for a total of five. Our previously announced mining location will be shifting to fiscal 2024 due to construction delays.
The change in our savings estimate is primarily related to incremental investment in store payroll and pay increases for eligible employees. We believe this incremental investment is important to maintain superior customer service levels and to recognize our team who are the lifeblood of our culture and operations.
Also made additional investments in marketing to support our custom space business and further awareness of new product introductions.
We now expect to reduce overall SG&A expense by approximately $17 million in the second half of the fiscal year compared to the second half of fiscal 2022 with the fourth quarter total dollar savings contributing almost two thirds of the anticipated decline.
Satish Malhotra: To highlight one of our technology initiatives in Q2, we have started testing AI-generated content on our website to create efficiencies and personalize the online experience for our customers. This conference is now automatically generated based on sophisticated prompts that incorporate customer reviews, rich vendor partner content that allows us to enhance product display pages, providing even more compelling reasons to buy, and greatly improving search capabilities.
Our outlook assumes operating margins of approximately negative two to negative 1%, we're operating loss of 20% to $13 million.
Inclusive of the $23 4 million noncash goodwill impairment charge in Q2 that was not reflected in our prior outlook.
Interest expense for fiscal 2023 is expected to be approximately $25 million driven by higher interest rates. Our effective tax rate is expected to be in the range of zero to negative 4%.
Satish Malhotra: And finally, as I've said many times, I implore you to use our electrolyte of this company and all contribute to its long-term stability and growth. Investing in our people and recognizing their contributions is critical in remaining an employer choice. In Q2, we announced the reinstatement about annual employee pay increase for eligible employees, effective October 1st. Like everyone, our people are contending with inflation, higher cost of living, and other economic pressures, and we firmly believe this pay increase was the right thing to do.
Due to the previously mentioned discrete income tax expense of approximately $2 8 million expected to be recorded primarily in the third quarter of fiscal 2023.
We expect net GAAP loss per share in fiscal 2023 to be in the range of 82 to <unk> 70.
After adjusting for the $23 4 million noncash goodwill impairment charge, the $2 5 million of severance expense incurred during the first quarter and the $2 8 million discrete income tax expense, we expect adjusted net loss per diluted share to be in the range of 24 to 13.
Satish Malhotra: We also added back some store payroll hours, and our revised S&E outlook now reflects these decisions. Additionally, we launched a new recognition program TCS appreciate. This program to facilitate paid-to-pay celebration to acknowledge the ways that our team members exemplify our company's foundation principles every day.
Capital expenditures are still expected to be approximately $45 million to $50 million and with this outlook. We now aim to be free cash flow neutral to slightly positive in fiscal 2023, almost half of our planned capital expenditures are related to new stores planned to be opened in fiscal 2023 were in fiscal 2024.
As a result of construction delays and our planned Miami, Florida small format store location. We are now planning to open five new stores in fiscal 2023, and four new stores in fiscal 2020 for the remaining.
Satish Malhotra: Before I turn the call over to Jeff, I want to reiterate our conviction and our strategy that we believe will serve us well and deliver our share gains when consumers begin prioritizing investments in their homes and market conditions normalized. We have a strong balance sheet in place and believe we are navigating today's environment with exceptional discipline while ensuring we further strengthen our competitive position.
Capital is related to investment in ecommerce 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. If you'd like to ask a question. Please press star one on your telephone keypad.
Jeffrey Miller: With that, I'll now hand it over to Jeff, Jeff. Thank you, Cepheesh, and good afternoon, everyone. As Cepheesh reviewed, we continued to contend with a tough macro backdrop and industry pressures that impacted our second quarter performance.
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Jeffrey Miller: However, our results did exceed our guidance ranges. For the second quarter, consolidated net sales decreased 19.4 percent year-over-year to 219.7 million. By segment, net sales for the container store retail business were 208.5 million, a 19.8 percent decrease compared to 259.9 million last year. The decrease is inclusive of the ComStore sales decrease of 20 percent, driven primarily by the 20.4 percent decline in our general merchandise categories, which negatively impacted ComStore sales by 1,320 basis points.
Thank you.
Our first question comes from the line of Kate Mcshane with Goldman Sachs. Please proceed with your question.
Hi, This is Emily <unk> on for Kate.
We were wondering if you could provide more detail on your expectations for promotions around holiday, how this might compare to last year and then promotional activity. So far this year. Thank you.
Hi, yes. Thank you for the question.
We obviously learned a lot during our Q1 quarter around how to think about our promotions and.
Jeffrey Miller: Custom spaces ComStore sales declined 19.3 percent compared to last year and negatively impacted ComStore sales by 680 basis points. Fails for new stores, more than offset the discontinuation of CStudio third-party sales year-over-year, which benefited total TCS net sales by 20 basis points. For the second quarter, fiscal 2023, our online channel decreased 21.7 percent year-over-year, and our website generated sales, which includes curbside pickup, decreased 60.4 percent compared to last year. Web site generated sales represented a total of 21.8% of PCS net sales in Q2 compared to 20.9% in Q2 last year.
Clearly demonstrate our ability to manage our promotional levers in Q2 delivering sales.
And adjusted EPS above the high end of expectations. So similarly, as we think about the back half and into holiday, we'll be looking at our promotional cadence with a level of student Qi just like we did in Q2.
We don't anticipate there being a significant change relative to al why other than the fact that we do have our normal alpha promotion and that we have every year.
Thank you.
Jeffrey Miller: An earned revenue decreased to 18.3 million in Q2 this year versus 22.1 million last year and reflects the pullback in customer spending that we are experiencing. Alpha-third party net sales of 11.2 million decreased 12.5% compared to the second quarter of fiscal 2022. Exploding the impact of foreign currency translation Alpha-third party net sales decreased 10.7% year over year, primarily due to decline in sales and the Nordic market. The decline in Alpha-third party sales reflects the continued challenging macro economic environment and in Nordic and other regions due to higher inflation and interest rates.
Thank you.
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Jeffrey Miller: From a profitability standpoint, our consolidated gross margin for Q2 increased 100 basis points to 57.6% compared to 56.6% last year. By segment, TCS gross margin increased 10 basis points compared to last year, primarily due to lower freight costs, partially offset by unfavorable mix and increased promotional activity. The unfavorable mix was primarily related to a shift in sales mix to lower margin general merchandise products during the quarter and increased promotional activity was primarily related to custom spaces.
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Jeffrey Miller: As we had an earlier than planned start of our 75th alpha anniversary event. Alpha gross margin increased 500 basis points compared to last year, primarily due to price increases. Consolidated SGN $8 increased 9.4 million or 7.9% to 109.3 million compared to 118.7 million Q2 last year, which reflects the cost management actions taken in the first quarter. As a percent of net sales, SGNA margin increased 620 basis points year over year to 49.7%.
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Jeffrey Miller: The increase is primarily due to the leverage of fixed costs associated with lower sales and the second quarter of fiscal 2023. Additionally, SGNA spend in Q2 last year included a 2.6 million dollar net benefit from a one-time legal settlement.
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During the quarter, we completed a impairment test of goodwill and indefinite life and tangible assets and concluded there was a total non-cash impairment of goodwill and the PCS reporting unit in the amount of 23.4 million. Our net interest expense and the second quarter of fiscal 2023 increased to 5.2 million compared to 3.8 million last year. The year over year increase is primarily due to a higher interest rate on our term loan and to the lesser extent higher borrowings on the revolving credit facility during the quarter.
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The effective tax rate for the quarter was negative 2.6%, compared to 25.9% in the second 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 second quarter of fiscal 2023 as compared to pre-tax income in the second quarter of fiscal 2022. NetLoss for the quarter on a gap basis, inclusive of the 23.4 million non-cash goodwill and paramcharge, was 23.7 million or 48 cents per share as compared to a gap net income of 15.7 million or 31 cents per diluted share in the second quarter of last year.
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The just a net income was 365,000 or 1 cent per share as compared to last year's adjusted net income of 13.8 million or 27 cents per diluted share. Our adjusted EBITDA decreased to 17 million in the second quarter of this year compared to 35.9 million in Q2 last year. Turning to our balance sheet, we ended the quarter with 10.2 million in cash, 173.2 million in total debt and total equity, including availability on a revolving credit facilities of 104.3 million.
Our current leverage ratio is 2.3 times. We ended the quarter with consolidated inventory down 8.8 percent compared to the second quarter last year. The decline is primarily the result of lower freight costs and inventory year over year. Capital expenditures were 22 million in the first half of fiscal 2023 versus 32 million in the first half of fiscal 2022, which reflects the plan pullback in capital spending in fiscal 2023. We are continuing to invest primarily in our stores and technology. Free cash flow in the first half of this year was a use of 1.3 million versus a use of 5.3 million in the first half of last year.
Jeffrey Miller: Now for our outlook. As the piece alluded to, we have updated our outlook to reflect certain items impacting the top and bottom line that I will discuss. While the macro backdrop remains tough, we continue to be extremely disciplined in investing in inventory, planning our campaigns, managing our expenses and allocating our capital while simultaneously making proven investments in alignment with our strategic initiatives and longer term growth plans. The third quarter of fiscal 2023, we expect consolidated net sales to be approximately 220 to 225 million driven primarily by a comparable store sales decline of mid to low teens.
Jeffrey Miller: The expected decline in comparable store sales is reflective of a pullback and our core and value oriented products in the third quarter compared to our previous outlook. The expected consolidated revenue declines are inclusive of continued alpha third party headwinds, which we expect to be more than offset by new store sales. We expect adjusted net loss per share in the third quarter to be in the range of eight cents to four cents.
Jeffrey Miller: The implied year over year operating margin decline for the third quarter is expected to be more than entirely driven by SG&A primarily due to fixed costy leverage on lower sales. Our SG&A spend expectations for the third quarter have increased from our previous outlook and include incremental investments in primarily store payroll, paying increases and marketing. From our growth margin perspective, is still expected to be a tailwind to gross margin in the third quarter in comparison to last year, partially offset by unfaithability within our general merchandise product mix.
Jeffrey Miller: Our outlook reflects our expectation that we will continue to drive increased sales from our new general merchandise product while also seeing greater pressure on our higher margin core general merchandise products. Interest expense for the third quarter is expected to be approximately 5.3 million driven primarily by higher interest rates. We expect income tax expense in a range of 2 to 2.5 million, primarily driven by discrete tax items in the third quarter. This discrete tax expense is primarily related to the expiration of certain stock options granted in connection with our initial public offering in 2013. As a result of these discrete items, our effective tax rate is expected to be in a range of negative 50% to negative 145%.
With respect to fiscal 2023, our press release outlines our current versus prior outlook the key changes are as follows. We now expect consolidated net sales in the range of 870 to 885 million, or 5 million lower than our previous outlook. We continue to expect less significant declines in comparable store sales in the second half of the fiscal year driven by our plan cadence of new product interactions and campaigns and the easing comp comparisons from the prior year.
The implied low to high teens, fourth quarter comparable store sales declines are primarily related to our plan custom space campaign cadence in fiscal 2023 compared to last year. We believe there could be more alpha product sales headwinds in the fourth quarter in comparison to the third quarter due to the pull for of our alpha product line sales during the fiscal year. Alpha is planned to be on promotion one more time in fiscal 2023 as compared to fiscal 2022.
We have reduced our gross margin projection by about 100 basis points for the fiscal year. Embedded in our updated gross margin projection, we believe freight will continue to be a tailwind to gross margin in fiscal 2023, partially offset by increased promotional activity and mixed dynamics within the journal merchandise category. We are seeing lower than expected sales of our higher margin core and more value oriented journal merchandise products while our new premium journal merchandise product which is lower margin has performed and is expected to perform better than originally expected.
Our outlook therefore assumes a gross profit range of 504 to 513 million. We have revised our expectation for SGNA savings to approximately 37 million for the year versus the previously planned 45 million. The change in our savings estimate is primarily related to incremental investment in store payroll and pay increases for eligible employees. We believe this incremental investment is important to maintain superior customer service levels and to recognize our keen for the light blood of our culture and operations.
We've also made additional investments in marketing to support our custom space business and further awareness of new product introductions. We now expect to reduce overall SGNA expense by approximately 17 million and the second half of the fiscal year compared to the second half of fiscal 2022 with the fourth quarter total dollar savings contributing almost two-thirds of the anticipated decline. Our outlook assumes operating margins of approximately negative two to negative one percent or operating loss of 20 to 13 million, inclusive of the 23.4 million non-cash goodwill impairment charge in Q2 that was not reflected in our prior outlook.
Interest expense for fiscal 2023 is expected to be approximately 20.5 million driven by higher interest rates. Our effective tax rate is expected to be in the range of zero to negative four percent. During the previously mentioned discrete income tax expense of approximately 2.8 million, expected to be recorded primarily in the third quarter of fiscal 2023. We expect net gap loss per share in fiscal 2023 to be in the range of 82 to 70 cents.
After adjusting for the 23.4 million non-cash goodwill impairment charge, the 2.5 million of severance expense incurred during the first quarter and the 2.8 million discrete income tax expense, we expect adjusted net loss per diluted share to be in the range of 24 to 13 cents. Capital expenditures are still expected to be approximately 45 to 50 million. And with this outlook, we now aim to be free cash flow neutral to slightly positive and fiscal 2023.
Almost half of our planned capital expenditures are related to new stores, planned to be open in fiscal 2023 or in fiscal 2024. As a result of construction delays at our planned Miami Florida small format store location, we are now planning to open five new stores in fiscal 2023 and four new stores in fiscal 2024. The remaining capital is related to investment in commerce, technology infrastructure, and software projects, and to a lesser extent maintenance.
Jeffrey Miller: This concludes our prepared remarks.
I'll now turn it over to the operator to begin the Q&A session. Thank you.
Operator: We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tool will indicate that your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your hand set before pressing the star keys. Thank you.
Emily Gosh: Our first question comes from the line of Kate McShane with Goldman Sachs. Please proceed with your question. Hi, this is Emily Gosh on for Kate.
Satish Malhotra: We were wondering if you could provide more detail on your expectations for promotions around holiday, how this might compare to last year, and then promotional activities so far this year. Thank you. Hi, yes, thank you for the question. You know, we obviously learned a lot during our Q1 quarter around how to think about our promotions and clearly demonstrate our ability to manage out promotional levers in Q2, delivering sales and adjusted EPS above the higher end of expectations.
Satish Malhotra: So similarly, as we think about the back half and into holiday, we'll be looking at our promotional cadence with a level of scrutiny just like we did in Q2. We don't anticipate there being a significant change relative to LY, other than the fact that we do have a normal alpha promotion that we have every year. Thank you, again that is star one if you would like to ask a question at this time. Thank you.
Operator: Ladies and gentlemen, we have reached the end of our question and answer session, and with that, this will conclude today's teleconference. You may now disconnect your lines at this time. Thank you for your participation. .