Q2 2025 The Container Store Group Inc Earnings Call
Speaker Change: Greetings and welcome to the container store second quarter 2024 earnings call. At this time, all participants are an allistened only mode.
Speaker Change: A brief question and answer session will follow the formal presentation.
Speaker Change: If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Caitlin Churchill and best your relations. Thank you, you may begin.
Caitlin Churchill: Good afternoon everyone and thanks for joining us today for the Container Stories 2nd Quarter of fiscal year 2024 earnings result conference call.
Caitlin Churchill: Speaking today are Satish Malhotra, Chief Executive Officer, and Jeff Miller, Chief Financial Officer. After Satish and Jeff have made their formal remarks, we will open the call to questions.
Caitlin Churchill: 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, including the transaction with BEYOND, and the future
Caitlin Churchill: and the future financial performance of the companies that are subject to risks and uncertainties.
Caitlin Churchill: Actual results could differ materially from those anticipated in these forward-looking statements.
Caitlin Churchill: The risk factors that may affect results are referred to in the Container Storage Press release issued today.
Caitlin Churchill: and in our annual report on Form 10-K filed with the SEC on May 28, 2024 as updated by our quarterly reports on Form 10-Q and other public filings with the U.S. Securities and Exchange Commission.
Caitlin Churchill: 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.
Caitlin Churchill: Finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call.
Speaker Change: A 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 issued today. A copy of today's press release and investor desk may be obtained by visiting the investor relations page of the website at www.containerstore.com. I will now turn the call over to Satish. Satish?
Satish Malhotra: Thanks, Caitlin, and thank you all for joining us.
Satish Malhotra: I'll begin today's discussion with a review of our second quarter performance and progress we are making to drive improvements across the business, including our exciting new strategic partnership with BEYOND.
Satish Malhotra: Then Jeff will discuss the details of the quarter's financial results before we open up the call to questions.
Satish Malhotra: While we are still contending with a challenging macro and industry backdrop, we are encouraged by the improvements we are seeing in our top line trends as compared to earlier this year.
Jeff Miller: For the second quarter, year-over-year comparable sales declined 12.5%.
Jeff Miller: However, we continue to see relative outperformance in custom spaces.
Jeff Miller: and achieved another quarter of sequential improvement in general merchandise trends.
Jeff Miller: This also enabled us to engage more effectively with customers seeking compelling value offerings.
Jeff Miller: Within General Merchandise, we believe our efforts to stabilize the business are gaining traction, particularly through improving in-stock levels of our core SKUs that continue to resonate with customers, while also delivering innovation and newness across the assortment.
Jeff Miller: Earlier this fall, we introduced our new Everything Organizer Drop Front Shoe Box at SneakerCon, the world's premier sneaker event.
Jeff Miller: This elevated version of a long-time customer favorite features crystal clear, 360-degree views.
Jeff Miller: a magnetic closure, four corner feet for stable stacking, and a tuck-away door for easy access, and was met with great enthusiasm at the event.
Jeff Miller: As we move into the holiday season, we look forward to showcasing this new product and this year's curated selection of stocking stuffers, gift wraps, boxes, and storage solutions.
Speaker Change: While we are optimistic about our holiday campaign, we have taken a more disciplined approach with tighter inventory buys around our seasonal items, maintaining our focus on top-performing SKUs.
Speaker Change: Post-holiday season, we are excited about the expected front feature display of our highly sought-after Everything Organizer collection.
Speaker Change: Developed in collaboration with professional organizers, this collection is designed to optimize any space.
Speaker Change: simplify organization, and seamlessly
Speaker Change: We plan to expand the product line with additional SKUs for the kitchen and closet, as well as introducing it to the bath category.
Speaker Change: Additionally, we entered into a new licensing partnership with our manufacturer, which is expected to expand the Everything Organizer collection internationally beginning in the new calendar year.
Speaker Change: Now, turning to custom spaces.
Speaker Change: As noted in our press release, our reported comparable store sales metric reflect only delivered sales.
Speaker Change: However, when we assess comp trends
Speaker Change: Custom Spaces order is placed but not yet delivered. We were up 4.5% compared to the prior year.
Speaker Change: This relative strength in custom spaces is partly due to the newness we've introduced over the past few quarters.
Speaker Change: For example, we are seeing more and more customers choosing Garage Plus by Alpha to transform their cluttered garages into organized, aesthetically pleasing spaces that meet their storage needs.
Speaker Change: Similarly, the Core Plus by Alpha continues to also gain traction, offering innovative modular wall-hanging solutions with elevated design options that create a built-in look at exceptional value while maximizing space.
Speaker Change: Last week, we launched a new campaign partnership with fashion designer and TV personality Tan France.
Speaker Change: where he transformed two of his kids' spaces with Alpha Deco plus and the necessary general merchandise completion products, highlighting the durability and versatility of the line.
Speaker Change: Looking ahead, we are excited to continue rolling out innovative products for custom spaces.
Speaker Change: Our next launch will introduce a more affordable premium wood closet in a box system designed for easy do-it-yourself installation.
Speaker Change: Building on our success and expertise in custom spaces and alpha metal box solutions, this new product offers nine versatile configurations for closets up to a six feet.
Speaker Change: We believe customers will appreciate its elevated premium design and flexible options throughout their homes.
Speaker Change: Thank you.
Speaker Change: Organization should be effortless. And this do-it-yourself solution empowers customers to creatively personalize how they organize their spaces.
Speaker Change: With the recent decline in interest rates, we are also optimistic about the future of our premium custom space offering Preston, which continues to demonstrate strength despite the current macroeconomic climate.
Speaker Change: We are pleased to see improvements in our conversion rates for Preston, as well as in our ability to sell more spaces at a higher average space value when compared to the same period last year.
Speaker Change: Additionally, we are looking forward to the newly announced strategic partnership with BEYOND.
Speaker Change: We believe this partnership would strengthen our capabilities by leveraging beyond data analytics to improve our lead management and conversion model while offering customers additional financial solutions to support their purchases.
Speaker Change: This is just one aspect of the partnership with BEYOND that we believe will enhance our capabilities, expand our reach, and deepen our relationship with customers.
Speaker Change: Through the licensing of the iconic Bed Bath & Beyond brand, we expect to enhance our store format and general merchandise offering to drive increased traffic across our businesses.
Speaker Change: Our customers are also expected to benefit from BEYOND's Global Loyalty Program, multiple payment solutions, and ancillary insurance and protection products.
Speaker Change: In addition, we plan to utilize BEYOND's growing data platform to enhance our marketing strategies and reduce customer acquisition and retention costs.
Speaker Change: We plan to integrate our custom spaces offering across BEYOND's portfolio of e-commerce banners as well as other ventures where BED, BATH, and BEYOND future licensed stores exist, thereby creating expanded distribution of our iconic custom spaces offering.
Speaker Change: I would now like to take an opportunity to acknowledge our teams.
Speaker Change: for their unwavering commitment and exceptional customer service.
Speaker Change: Despite the challenging economic conditions, our teams from the support center and distribution centers to our designers and stores have remained dedicated and focused on advancing our strategy and supporting initiatives.
Speaker Change: While external economic factors are beyond our control, our focus remains on managing what we can, providing the excellent customer service we are known for.
Speaker Change: controlling expenses and capital, stabilizing the general merchandise business, and positioning ourselves for when the market conditions become more favorable.
Speaker Change: And now I'll turn the call over to Jeff to discuss our financial results in more detail.
Speaker Change: Jeff
Jeff Miller: Thank you, Satish, and good afternoon, everyone.
Jeff Miller: As Satish reviewed, while still challenged, our second quarter results reflect another quarter of sequential improvement compared to the prior quarter, with ongoing relative strength within custom spaces.
Jeff Miller: For the second quarter, consolidated net sales decreased 10.5% year-over-year to $196.6 million.
Jeff Miller: By segment, net sales for the container store retail business were $186.8 million.
Jeff Miller: a 10.4% decrease compared to $208.5 million in the prior year.
Jeff Miller: The decrease is inclusive of a comp store sales decrease of 12.5%.
Jeff Miller: driven primarily by the 18.7% decline in our general merchandise categories, which negatively impacted comp store sales by 1,200 basis points.
Jeff Miller: Custom space comp store sales decreased 1.5% compared to last year and negatively impacted comp store sales by 50 basis points.
Jeff Miller: As a reminder, our comp store sales are reported on a gap basis and represent delivered sales.
Jeff Miller: when looking at Custom Spaces comps.
Jeff Miller: from an operational demand standpoint.
Jeff Miller: orders placed but not delivered were up 4.5% in Q2 representing a modest year over year trend improvement from the 2.9% we saw for the same metric in Q1.
Jeff Miller: It has been a while since we have referenced this operational demand comp metric.
Jeff Miller: The delta between operational demand and reported comps for custom spaces this quarter is evidenced by the increased
Jeff Miller: unearned revenue from $18.3 million last year.
Jeff Miller: to $21.8 million this year, largely as a result of a year-over-year shift in timing of custom space orders placed versus delivered to customers.
Jeff Miller: Sales from non-comparable stores were a net benefit to total TCS sales of 210 basis points.
Jeff Miller: For the second quarter, fiscal 2024, our online channel decreased 13.7% year-over-year and our website-generated sales, which includes curbside pickup, decreased 7.9% compared to last year.
Jeff Miller: Website generated sales represented a total of 22.4% of TCS net sales in Q2, which is 60 basis points higher than 21.8% in Q2 of last year.
Jeff Miller: Alpha third-party net sales of $9.8 million decreased 12.9% compared to the second quarter of fiscal 2023.
Jeff Miller: Excluding the impact of foreign currency translation, alpha third-party net sales decreased 16.2% year-over-year.
Jeff Miller: primarily due to a decline in sales in the Nordic markets.
Jeff Miller: From a profitability standpoint, our consolidated gross margin for Q2 decreased 210 basis points.
Jeff Miller: to 55.5% compared to 57.6% last year.
Jeff Miller: By segment, TCS gross margin decreased 260 basis points compared to last year, primarily due to increased promotional activity and unfavorable mix in Q2 of this year, partially offset by freight tailwinds.
Jeff Miller: Alpha gross margin increased 250 basis points compared to last year, primarily due to price increases to customers.
Jeff Miller: Consolidated SG&A dollars decreased $4.1 million or 3.7% to $105.2 million compared to $109.3 million in Q2 last year.
Jeff Miller: As a percentage of net sales, SG&A increased 380 basis points year-over-year to 53.5%.
Jeff Miller: The increase is primarily due to de-leverage, a fixed cost associated with lower sales, and increased marketing spend in the second quarter of fiscal 2024.
Jeff Miller: Also in the second quarter, we recorded 3.5 million of other expenses.
Jeff Miller: which is primarily due to legal and professional fees related to the Strategic Alternatives Review, as well as employee retention costs incurred in the second quarter of fiscal 2024.
Jeff Miller: Our net interest expense in the second quarter of fiscal 2024 increased to $6 million compared to $5.2 million in the second quarter of last year.
Jeff Miller: The year over year increase is primarily due to higher borrowings on the revolving credit facility.
Jeff Miller: and hire year-over-year interest rates on our term loan during Q2.
Jeff Miller: The effective tax rate for the second quarter was 21.5%, compared to negative 2.6% in the second quarter of last year.
Jeff Miller: The increase 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, which drove the effective tax rate negative.
Jeff Miller: Net loss for the quarter on a gap basis was $16.1 million, or $4.85 per share, as compared to a gap net loss of $23.7 million, or $7.17 per share in the second quarter of last year.
Jeff Miller: Adjusted net loss was $10.7 million, or $3.23 per share, as compared to a $1.5 million loss
Jeff Miller: last year's adjusted net income of 0.4 million or 11 cents per diluted share.
Jeff Miller: Our adjusted EBITDA decreased to $3.9 million in the second quarter this year compared to $17 million in Q2 last year.
Jeff Miller: Turning to our balance sheet, we ended the quarter with $66.1 million in cash, $232 million in total debt, and total liquidity, including availability on our revolving credit facilities, of $96.5 million.
Jeff Miller: As you know, we have faced challenges due to softening demand and increased price sensitivity affecting our financial performance.
Jeff Miller: In addition to significant expenses incurred as a part of our review of strategic alternatives and refinancing of our credit facilities.
Jeff Miller: all of which have placed pressure on our ability to comply with the leverage ratio covenant in our term loan facility.
Jeff Miller: As previously communicated, earlier this month we amended our Senior Secured Term Loan Facility.
Jeff Miller: to waive the testing of Consolidated Leverage Ratio Covenant for the second quarter of fiscal 2024, among other things.
Jeff Miller: In addition, our evolving credit facility, under which we had 71 million outstanding at the end of the quarter, matures in one year.
Jeff Miller: In light of these factors, you will see the addition of going concern language in our Form 10-Q for the second quarter of fiscal 2024.
Jeff Miller: We are actively collaborating with our lenders to amend or refinance these facilities and consummate the equity investment transaction with BEYOND, which we believe would improve our financial situation.
Jeff Miller: We ended the quarter with consolidated inventory down 12% compared to the second quarter of last year.
Jeff Miller: The decline reflects a concerted effort to tightly manage inventory in the current environment,
Jeff Miller: year-over-year and lower freight costs held in inventory.
Jeff Miller: At TCS, on a unit basis, on-hand inventory was down approximately 17% year-over-year driven by general merchandise categories.
Jeff Miller: Capital expenditures were $15.3 million in the first half of fiscal 2024 versus $22 million in the first half of fiscal 2023.
Jeff Miller: As a reminder, we plan to spend approximately $20 to $25 million of capital in fiscal 2024.
Jeff Miller: We're continuing to prioritize investments in our stores and technology this year. We've opened one store, closed one store, during the second quarter of fiscal 2024.
Jeff Miller: For the remainder of fiscal 2024, we plan to open two more new stores, and I've made the strategic decision to close our store in Chicago at Chicago South Loop.
Jeff Miller: We closely monitored the productivity of our stores and decided it was not in the company's best interest to renew the lease when it ends in February of 2025.
Jeff Miller: Free cash flow used in the first half of fiscal 2024 was $10.6 million versus $1.3 million in the first half of fiscal 2023.
Jeff Miller: As noted on our press release, we're not providing financial guidance at this time.
Jeff Miller: With respect to Q3, we have seen a challenging start to the period largely due to the difficult comparison to last year.
Jeff Miller: which benefited from the very successful Alpha anniversary sale.
Jeff Miller: That said, we have continued to see sequential improvement in general merchandise.
Jeff Miller: And as Satish reviewed, we believe we are taking the right steps to stabilize that business.
Jeff Miller: We are controlling the aspects of the business we can control and continue to work diligently to aim to position the company for long-term success.
Jeff Miller: This concludes our prepared remarks. I'll now turn it over to the operator to begin the Q&A session for questions.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.
Speaker Change: Our first question comes from Kate McShane with Goldman Sachs. Please proceed with your question.
Kate Mcshane: Thanks for taking our question. I wondered if I could start with the myths within general merchandise. Maybe what is trending better if there's anything that's trending worse? And if you could give a little bit more commentary on Quora today, which I think you said was sequentially a little bit better.
Speaker Change: Yeah. Hi, Kate. I'll take the first part of that question.
Speaker Change: Definitely we are seeing sequential improvement in our general merchandise.
Speaker Change: primarily thanks to our getting back in stock in our core SKUs. We've seen a positive momentum in water hyacinths, for example, now that we're back in stock there, but also seeing tremendous growth in our Everything Organizer connection, as I had mentioned earlier.
Speaker Change: It continues to do well. It's actually up 14% over the prior quarter and up 50% compared to the same period last year, and that's why we are super excited about our ability.
Speaker Change: to be able to have the Everything Organizer have a front feature expression post-holiday where we can continue to introduce those additional SKUs in Kitchen and Closet, as well as the new launch that we have planned within Bath.
Speaker Change: It's actually one of the reasons we decided to also work with our vendor to now license the Everything Organizer collection internationally because we think there is decisively a significant demand outside of the U.S. and to other countries as well.
Speaker Change: Okay, thank you. And then I had a mechanical question with regards to the demand comp. It sounds like the demand comp for custom space is improved sequentially. Could you maybe talk about when...
Speaker Change: your comp catches up to the demand comp or maybe better ask like what is typically the delivery time or the amount of time between order placed and order delivered?
Speaker Change: This is Jeff. Thanks for the question.
Speaker Change: a custom space order.
Jeff Miller: It depends on the particular line would drive your average install time frame. I would say an alpha product line would be anywhere between two weeks to a month.
Jeff Miller: It could be longer, depending on the customer's project timeline.
Jeff Miller: But Preston's a little bit longer of a timeline, typically that's around four to six weeks.
Jeff Miller: from the order placement time.
Speaker Change: Thank you.
Speaker Change: Okay, and is Preston becoming a bigger part of the mix? Part of the reason why you're seeing this gap occur again?
Speaker Change: Now I wouldn't necessarily say that Preston is becoming a bigger part of the mix at this point yet.
Speaker Change: our unearned revenue or our prepaid sales at the end of the quarter like that.
Speaker Change: Okay.
Speaker Change: Okay and then my last question is just with regards to Alpha. You mentioned the challenging start to Q3 because you're lapping the successful Alpha anniversary sale. Can you just remind us
Speaker Change: you know what you are doing with the Alpha brand this year versus last year.
Speaker Change: In terms of the campaigns that we have? Yes.
Speaker Change: Yeah, this is Satish. So, as we mentioned, we decided to actually split the Alpha campaign into kind of two halves.
Speaker Change: which is a new way for us to create kind of a sense of urgency than we had normally done in the past, where we would essentially just have one long campaign. The durations of the campaigns are actually the same in terms of the number of days, but we just put a pause in the middle.
Speaker Change: so that we could conclude Part A of the campaign as we were ramping up the end of the quarter and then wait a period before we then start the second part of the campaign. In addition, as a reminder, this time last year we also had an anniversary sale and so we are comping over that period.
Speaker Change: Thank you.
Speaker Change: Absolutely.
Speaker Change: We have reached the end of our question and answer session. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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