Container Store Group Still Needs to Clean Up Its Mess

By Markets Fool.com


Source: Container Store.

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In its much-anticipated IPO in late 2013, Container Store Group had many investors excited about its prospects. The organizational-goods retailer has a strong employee culture and a sustainability-minded CEO in Kip Tindell. Yet last year, Container Store stock lost more than half of its value, and investors were looking forward to Thursday afternoon's release of fiscal third-quarter financial information to see evidence that the company had started turning things around.

Unfortunately, Container Store's latest results still leave many questions unanswered, and shareholders will have to wait longer before they'll have a chance at seeing improvement in key financial measures. Let's take a closer look at Container Store Group's quarterly results with an eye toward determining what investors should expect going forward.

Another quarter of sluggish revenue growth for Container Store
Container Store Group's headline numbers didn't deliver the expectations-beating results that investors had hoped to see. Net revenue was just $190.9 million, which represented a 1.4% boost from year-ago levels, but fell well short of the 5.8% growth that analysts expected from Container Store. Adjusted net income came in at $0.07 per share, matching estimates, but still falling 38% from last year's fiscal third quarter.

Perhaps the most disappointing piece of news came from Container Store's weak comparable-store sales. Comps fell another 3.5% during the quarter, which was just barely at the lowest end of the guidance range Container Store had given previously. Online sales gains of more than 13% pointed to the possible role that e-commerce could play in a turnaround for the retailer, but they were insufficient to make a dent in the poor performance of its brick-and-mortar store network.

Looking more closely at the numbers, Container Store fell short in several areas. Gross margins fell slightly from the year-ago quarter, with customers shifting to lower-margin products in its key Elfa segment. Overhead expenses climbed much more rapidly than revenue, with fixed costs responsible for increasing Container Store's ratio of overhead expenses to net revenue by two full percentage points. The result was a slight decline in adjusted operating earnings even before considering higher tax rates, as well as other costs like interest, depreciation, and amortization.

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Source: Container Store.

A strong U.S. dollar also weighed on results. With the Swedish krona falling against the dollar, Container Store's growth in local currency terms from Elfa third-party sales turned into a decline in dollar terms.

Still, Tindell remained upbeat, pointing to initiatives he believes will turn things around. Among them are Container Store's Perfect Organized Perks loyalty program, as well as its Contained Home design and organization service and its TCS Closets collection of organizational systems. By encouraging repeat business and trying to encourage higher-margin business, Tindell hopes that these moves will bear fruit in the years ahead.

When will Container Store start living up to its potential?
Investors have every right to be impatient with Container Store's progress, but there are at least a few signs of hope on the horizon. Container Store said in its earnings release that it has seen better performance in comparable-store sales during the current quarter, with 2.7% higher sales through Jan. 7, than it saw during the same period last year.

Yet the rest of Container Store's future guidance was discouraging. The company expects adjusted net income of between $0.41 and $0.44 per share for the year, which surrounds the current consensus estimate among investors. On the revenue side, though, Container Store's sales will fall short, with new projections for $785 million to $795 million well below the $803 million in sales that most had hoped Container Store would generate during the full fiscal year. Despite encouraging fourth-quarter results so far, full-year comps will likely come in negative or break-even at best.

It's clear that Container Store Group still has plenty of work to do to overcome the difficulties it has had generating greater sales and profits from its existing store network.

The article Container Store Group Still Needs to Clean Up Its Mess originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends The Container Store Group. The Motley Fool owns shares of The Container Store Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.