Container Store Falls Apart on Unexpected Losses

Image: Container Store.

When a company is trying to turn itself around, investors often have to be patient. Yet there's only so much patience any shareholders can have, and Container Store Group found out after its fiscal third-quarter financial report that its investors are starting to lose hope of ever seeing the organizational-goods retailer complete a successful restructuring of its business. Coming into the report, investors were modestly optimistic that Container Store could generate some revenue growth and keep declines in its net income under control. In that light, the retailer's net loss came as a shock, and a larger than expected sales decline led many investors to throw in the towel, sending shares down more than 40% after the announcement. Let's take a closer look at Container Store Group and why it plunged on Friday.

Container Store can't get itself organized Given the difficulties that Container Store has dealt with for a long time, its fiscal third-quarter results didn't seem to justify the huge reaction that shareholders had. Revenue growth actually accelerated from the second quarter, rising 3.3% to $197.2 million, although that was slower than the roughly 4.5% growth rate that investors had wanted to see. The company's bottom-line results weren't pretty, with the company losing $1.7 million or $0.04 per share, compared to the nickel per share profit that was the consensus forecast among investors.

A closer look at the company's results shows some of the many challenges that Container Store continues to face. Comparable-store sales were up only 0.5% year-over-year, building only minimal upward momentum from last quarter's nearly flat performance. Retail-store sales were up 5.4% due to new store openings, and in local currency terms, sales from Sweden's Elfa Inetrnational climbed 2.1%. Yet the strong U.S. dollar cost the company nearly two percentage points of growth.

Container Store kept making the argument that 2015 is what it refers to as an "investment year" in justifying losses. The company said it spent about $0.03 per share on key strategic initiatives designed to position it for greater success down the road, and it expects to see a marked impact in the coming year and further into the future. CEO Kip Tindell toed the line, saying that "our key initiatives are gaining momentum, which is encouraging as we position our company for sustained, long-term growth." Despite his disappointment with the poor results, Tindell remains convinced that new moves like the TCS Closets concept should help Container Store recover.

Why don't investors share Container Store's optimism?The problem that Container Store faces is that shareholders are losing patience with the retailer's pace of its turnaround, and they're increasingly uncertain whether the company can get things fixed soon enough for 2016 to be a high-growth year. For instance, the company released figures on TCS Closets that it intended to show the growth of the concept, saying that it had 0.4 transactions per store in November. With a 74-store network, that only works out to about 30 sales per month, and even though the average ticket is more than $10,000, it's hard to see how a roughly $300,000 bump in revenue from TCS Closets will be the ultimate answer to the retailer's woes.

Moreover, Container Store's guidance points to continued weakness for the holiday quarter. The retailer cut its revenue outlook by $15 million to $20 million, setting a new range of $785 million to $800 million. It now expects comparable-store sales to fall 1% to 1.6%, compared to previous expectations of flat comps to down 1%. As Container Store was kind enough to point out, those figures imply comparable-store sales declines of 3% to 5% for the fourth quarter, with net income of just $0.19 to $0.22 per share, about a dime below the current $0.31 per share consensus among investors.

Traders of Container Store shares focused on the potential for further deterioration, as the stock's 41% drop leaves its share price off more than 80% since last April. With a short interest of almost 19%, there are plenty of people betting against Container Store's future, but those who are bullish on the stock will have to wait a while longer before they can expect to see more concrete signs of a long-term turnaround taking shape.

The article Container Store Falls Apart on Unexpected Losses originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.

Copyright 1995 - 2016 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.