THE CONTAINER STORE GROUP, INC. Cautionary note regarding forward-looking statements
This report, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other similar expressions. The forward-looking statements included in this Quarterly Report, including without limitation statements regarding expectations for our business, anticipated financial performance and liquidity, anticipated capital expenditures and interest expense, and expectations regarding our second distribution center, are only predictions and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These include, but are not limited to: a decline in the health of the economy and the purchase of discretionary items; risks related to a security breach or cyber-attack of our website or information technology systems, and other damage to such systems; effects of competition on our business; the risk that our operating and financial performance in a given period will not meet the guidance we provided to the public; the risk that significant business initiatives may not be successful; our inability to source and market our products to meet customer preferences or inability to offer customers an aesthetically pleasing shopping environment; risks related to our indebtedness; our inability to effectively manage online sales; our dependence primarily on a single distribution center for all of our stores; risks related to opening a second distribution center; risks related to our reliance on independent third-party transportation providers for substantially all of our product shipments; risks associated with our dependence on foreign imports; material damage to or interruptions in our information technology systems; our inability to lease space on favorable terms; the vulnerability of our facilities and systems to natural disasters and other unexpected events; our reliance on third-party web service providers; our failure to successfully anticipate consumer demand and manage inventory commensurate with demand; our ability to control increasing costs, including fluctuations in currency exchange rates and rising health care and labor costs; risks related to new store openings; our dependence on our brand image and any inability to protect our brand; our failure to effectively manage our growth; risks related to our inability to obtain capital on satisfactory terms or at all; disruptions in the global financial markets leading to difficulty in borrowing sufficient amounts of capital to finance the carrying costs of inventory to pay for capital expenditures and operating costs; our inability to obtain merchandise from our vendors on a timely basis and at competitive prices; the risk that our vendors may sell their products to our competitors; our dependence on key executive management, and the transition in our executive leadership; our inability to find, train and retain key personnel; labor activities and unrest; risks related to violations of anti-bribery and anti-kickback laws; risks related to our fixed lease obligations; risks related to litigation; product recalls and/or product liability and changes in product safety and consumer protection laws; changes in statutory, regulatory, accounting and other legal requirements; risks related to changes in estimates or projections used to assess the fair value of our intangible assets; fluctuations in our tax obligations and effective tax rate and realization of our deferred tax assets; impacts to our business as a result of the Tax Cuts and Jobs Act; seasonal fluctuations in our operating results; material disruptions in one of our Elfa manufacturing facilities; our inability to protect our intellectual property rights and claims that we have infringed third parties' intellectual property rights; risks related to our status as a controlled company; significant fluctuations in the price of our common stock; substantial future sales of our common stock, or the perception that such sales may occur, which could depress the price of our common stock; risks related to being a public company; anti-takeover provisions in our governing documents, which could delay or prevent a change in control; and our failure to establish and maintain effective internal controls. Other important risk factors that could affect the outcome of the events set forth in these statements and that could affect our operating results and financial condition are described in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year endedMarch 30, 2019 , filed with theSecurities and Exchange Commission (the "SEC") onMay 30, 2019 . We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this report. Because forward-looking statements are inherently subject to risks and uncertainties, you should not rely on these forward-looking statements as predictions of future 20 Table of Contents events. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein after the date of this report, whether as a result of any new information, future events or otherwise. Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to the "Company," "we," "us," and "our" refer toThe Container Store Group, Inc. and, where appropriate, its subsidiaries. We follow a 4-4-5 fiscal calendar, whereby each fiscal quarter consists of thirteen weeks grouped into two four-week "months" and one five-week "month", and our fiscal year is the 52- or 53-week period ending on the Saturday closest toMarch 31 . Fiscal 2019 ends onMarch 28, 2020 and fiscal 2018 ended onMarch 30, 2019 . The third quarter of fiscal 2019 ended onDecember 28, 2019 and the third quarter of fiscal 2018 ended onDecember 29, 2018 , and both included thirteen weeks. Overview The Container Store® is the original and leading specialty retailer of storage and organization products and solutions inthe United States and the only national retailer solely devoted to the category. We provide a collection of creative, multifunctional and customizable storage and organization solutions that are sold in our stores and online through a high-service, differentiated shopping experience. We feature The Container Store Custom Closets consisting of our elfa® Classic, elfa® Décor, Avera™ and Laren™ closet lines. Our vision is to be a beloved brand and the first choice for customized organization solutions and services. Our customers are highly educated, very busy and primarily homeowners with a higher than average household income. We service them with storage and organization solutions that help them accomplish projects, maximize their space, and make the most of their home.
Our operations consist of two operating segments:
?The Container Store ("TCS"), which consists of our retail stores, website and call center (which includes business sales), as well as our installation and organizational services business. As ofDecember 28, 2019 , we operated 93 stores with an average size of approximately 25,000 square feet (19,000 selling square feet) in 33 states and theDistrict of Columbia . We offer our customers their choice of how to shop-in-store, online or through our in-home services. Our stores receive substantially all of our products directly from our distribution center co-located with our corporate headquarters and call center inCoppell, Texas and we have opened a second distribution center inAberdeen, Maryland , which is expected to be fully operational in late fiscal 2019. ? Elfa,The Container Store, Inc.'s wholly-owned Swedish subsidiary, ElfaInternational AB ("Elfa"), designs and manufactures component-based shelving and drawer systems and made-to-measure sliding doors. Elfa was founded in 1948 and is headquartered in Malmö,Sweden . Elfa's shelving and drawer systems are customizable for any area of the home, including closets, kitchens, offices and garages. Elfa operates three manufacturing facilities with two located inSweden and one inPoland .The Container Store began selling elfa® products in 1978 and acquired Elfa in 1999. Today our TCS segment is the exclusive distributor of elfa® products in theU.S. Elfa also sells its products on a wholesale basis to various retailers in approximately 30 countries around the world, with a concentration in the Nordic region ofEurope . Note on Dollar Amounts All dollar amounts in this Management's Discussion and Analysis of Financial Condition and Results of Operations are in thousands, except per share amounts and unless otherwise stated. 21 Table of Contents Results of Operations The following data represents the amounts shown in our unaudited consolidated statements of operations expressed in dollars and as a percentage of net sales and operating data for the periods presented. For segment data, see Note 10 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Thirteen Weeks Ended Thirty-Nine Weeks Ended December 28, December 29, December 28, December 29, 2019 2018 2019 2018 Net sales$ 228,657 $ 221,637 $ 674,609 $ 641,913 Cost of sales (excluding depreciation and amortization) 94,292 91,580 283,633 266,510 Gross profit 134,365 130,057 390,976 375,403 Selling, general, and administrative expenses (excluding depreciation and amortization) 111,972 108,688 334,281 320,949 Stock-based compensation 799 632 2,575 1,987 Pre-opening costs 2,482 691 5,988 1,918 Depreciation and amortization 9,689 8,887 28,137 27,352 Other (income) expenses (1) 80 375 297 Gain on disposal of assets (8) (324) (12) (284) Income from operations 9,432 11,403 19,632 23,184 Interest expense, net 5,134 6,008 16,245 21,293 Loss on extinguishment of debt - - - 2,082 Income (loss) before taxes 4,298 5,395 3,387 (191) Provision (benefit) for income taxes 1,886 (3,926) 1,428 (5,989) Net income $ 2,412$ 9,321 $ 1,959 $ 5,798 Thirteen Weeks Ended Thirty-Nine Weeks Ended December 28, December 29, December 28, December 29, 2019 2018 2019 2018 Percentage of net sales: Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales (excluding depreciation and amortization) 41.2 % 41.3 % 42.0 % 41.5 % Gross profit 58.8 % 58.7 % 58.0 % 58.5 % Selling, general, and administrative expenses (excluding depreciation and amortization) 49.0 % 49.0 % 49.6 % 50.0 % Stockbased compensation 0.3 % 0.3 % 0.4 % 0.3 % Preopening costs 1.1 % 0.3 % 0.9 % 0.3 % Depreciation and amortization 4.2 % 4.0 % 4.2 % 4.3 % Other (income) expenses (0.0) % 0.0 % 0.1 % 0.0 % Gain on disposal of assets (0.0) % (0.1) % (0.0) % (0.0) % Income from operations 4.1 % 5.1 % 2.9 % 3.6 % Interest expense, net 2.2 % 2.7 % 2.4 % 3.3 % Loss on extinguishment of debt - % - % - % 0.3 % Income (loss) before taxes 1.9 % 2.4 % 0.5 % (0.0) % Provision (benefit) for income taxes 0.8 % (1.8) % 0.2 % (0.9) % Net income 1.1 % 4.2 % 0.3 % 0.9 % Operating data: Comparable store sales growth for the period (1) 3.0 % (0.8) % 5.3 % 1.5 % Number of stores open at end of period 93 92 93 92 NonGAAP measures (2): Adjusted EBITDA (3)$ 22,007 $ 21,816 $ 55,076 $ 58,554 Adjusted net income (4) $ 2,411$ 3,543 $ 2,249 $ 4,279 Adjusted net income per common share - diluted (4) $ 0.05 $
0.07 $ 0.05 $ 0.09
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(1) A store is included in the comparable store sales calculation on the first
day of the sixteenth full fiscal month following the store's opening.
Comparable store sales reflect the point at which merchandise and service
orders are fulfilled and delivered to customers, excluding shipping and
delivery, and are net of discounts and returns. When a
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store is relocated, we continue to consider net sales from that store to be
comparable store sales. A store temporarily closed for more than seven days is
not considered comparable in the fiscal month it is closed. The store then
becomes comparable on the first day of the following fiscal month in which it
reopens. Net sales from our website and call center (which includes business
sales) are also included in calculations of comparable store sales.
(2) We have presented EBITDA, Adjusted EBITDA, adjusted net income, and adjusted
net income per common share - diluted as supplemental measures of financial
performance that are not required by, or presented in accordance with,
accounting principles generally accepted in
("GAAP"). These non-GAAP measures should not be considered as alternatives to
net income as a measure of financial performance or cash flows from
operations as a measure of liquidity, or any other performance measure
derived in accordance with GAAP and they should not be construed as an
inference that our future results will be unaffected by unusual or
non-recurring items. These non-GAAP measures are key metrics used by
management, our board of directors, and Leonard Green and Partners, L.P. ("LGP") to assess our financial performance. We present these non-GAAP
measures because we believe they assist investors in comparing our
performance across reporting periods on a consistent basis by excluding items
that we do not believe are indicative of our core operating performance and
because we believe it is useful for investors to see the measures that
management uses to evaluate the Company. These non-GAAP measures are also
frequently used by analysts, investors and other interested parties toevaluate companies in our industry. In evaluating these non-GAAP measures,
you should be aware that in the future we will incur expenses that are the
same as or similar to some of the adjustments in this presentation. Our
presentation of these non-GAAP measures should not be construed to imply that
our future results will be unaffected by any such adjustments. Management
compensates for these limitations by relying on our GAAP results in addition
to using non-GAAP measures supplementally. Our non-GAAP measures are not
necessarily comparable to other similarly titled captions of other companies
due to different methods of calculation. Please refer to footnotes (3) and
(4) of this table for further information regarding why we believe each
non-GAAP measure provides useful information to investors regarding ourfinancial condition and results of operations, as well as the additional
purposes for which management uses each non-GAAP financial measure.
Additionally, this Management's Discussion and Analysis also refers to Elfa
third-party net sales after the conversion of Elfa's net sales from Swedish
krona to U.S. dollars using the prior year's conversion rate. The Company
believes the disclosure of Elfa third-party net sales without the effects of
currency exchange rate fluctuations helps investors understand the Company's
underlying performance.
(3) EBITDA and Adjusted EBITDA have been presented in this Quarterly Report on
Form 10-Q as supplemental measures of financial performance that are not
required by, or presented in accordance with, GAAP. We define EBITDA as net
income before interest, taxes, depreciation, and amortization. Adjusted
EBITDA is calculated in accordance with our Secured Term Loan Facility (as
defined below) and the Revolving Credit Facility (as defined below) and is
one of the components for performance evaluation under our executive
compensation programs. Adjusted EBITDA reflects further adjustments to EBITDA
to eliminate the impact of certain items, including certain non-cash and
other items that we do not consider in our evaluation of ongoing operating
performance from period to period as discussed further below.
EBITDA and Adjusted EBITDA are included in this Quarterly Report on Form 10-Q
because they are key metrics used by management, our board of directors and LGP
to assess our financial performance. In addition, we use Adjusted EBITDA in
connection with covenant compliance and executive performance evaluations, and
we use Adjusted EBITDA to supplement GAAP measures of performance to evaluate
the effectiveness of our business strategies, to make budgeting decisions and to
compare our performance against that of other peer companies using similar
measures. We believe it is useful for investors to see the measures that
management uses to evaluate the Company, its executives and our covenant
compliance, as applicable. EBITDA and Adjusted EBITDA are also frequently used
by analysts, investors and other interested parties to evaluate companies in our
industry.
EBITDA and Adjusted EBITDA are not GAAP measures of our financial performance or
liquidity and should not be considered as alternatives to net income as a
measure of financial performance or cash flows from operations as a measure of
liquidity, or any other performance measure derived in accordance with GAAP and
they should not be construed as an inference that our future results will be
unaffected by unusual or non-recurring items. Additionally,
23Table of Contents
EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for
management's discretionary use, as they do not reflect certain cash requirements
such as tax payments, debt service requirements, capital expenditures, store
openings and certain other cash costs that may recur in the future. EBITDA and
Adjusted EBITDA contain certain other limitations, including the failure to
reflect our cash expenditures, cash requirements for working capital needs and
cash costs to replace assets being depreciated and amortized. In evaluating
Adjusted EBITDA, you should be aware that in the future we will incur expenses
that are the same as or similar to some of the adjustments in this presentation,
such as pre-opening costs and stock compensation expense. Our presentation of
Adjusted EBITDA should not be construed to imply that our future results will be
unaffected by any such adjustments. Management compensates for these limitations
by relying on our GAAP results in addition to using EBITDA and Adjusted EBITDA
supplementally. Our measures of EBITDA and Adjusted EBITDA are not necessarily
comparable to other similarly titled captions of other companies due to
different methods of calculation.
A reconciliation of net income to EBITDA and Adjusted EBITDA is set forth below:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
December 28, December 29, December 28, December 29,
2019 2018 2019 2018
Net income $ 2,412 $ 9,321 $ 1,959 $ 5,798
Depreciation and amortization 9,689 8,887 28,137 27,352
Interest expense, net 5,134 6,008 16,245 21,293
Income tax provision (benefit) 1,886 (3,926) 1,428 (5,989)
EBITDA 19,121 20,290 47,769 48,454
Pre-opening costs (a) 2,482 691 5,988 1,918
Non-cash lease expense (b) (355) 101 (1,532) (1,117)
Stock-based compensation (c) 799 632 2,575 1,987
Loss on extinguishment of debt (d) - - - 2,082
Foreign exchange (gains) losses (e) (37) 22 (98) 69
Optimization Plan implementation charges (f) - - - 4,864
Elfa France closure (g) (1) - 402 -
Other adjustments (h) (2) 80 (28) 297
Adjusted EBITDA $ 22,007 $ 21,816 $ 55,076 $ 58,554 --------------------------------------------------------------------------------
(a) Non-capital expenditures associated with opening new stores, relocating
stores and net costs associated with opening the second distribution center,
including marketing expenses, travel and relocation costs, and training
costs. We adjust for these costs to facilitate comparisons of our performance
from period to period.
(b) Reflects the extent to which our annual GAAP operating lease expense has been
above or below our cash operating lease payments. The amount varies depending
on the average age of our lease portfolio (weighted for size), as our GAAP
operating lease expense on younger leases typically exceeds our cash
operating lease payments, while our GAAP operating lease expense on older
leases is typically less than our cash operating lease payments. In the
thirteen and thirty-nine weeks ended
associated with the opening of the second distribution center were excluded
from Non-cash lease expense and included in Pre-opening costs.
(c) Non-cash charges related to stock-based compensation programs, which varyfrom period to period depending on volume and vesting timing of awards. We
adjust for these charges to facilitate comparisons from period to period.
(d) Loss recorded as a result of the amendments made to the Senior Secured Term
Loan Facility in
of our ongoing operations.
(e) Realized foreign exchange transactional gains/losses our management does not
consider in our evaluation of our ongoing operations.
(f) Charges incurred to implement our four-part optimization plan to drive
improved sales and profitability, launched during fiscal 2017 (the
"Optimization Plan"), which include certain consulting costs recorded in
selling, general and
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administrative expenses ("SG&A") in the first quarter of fiscal 2018, which we do not consider in our evaluation of ongoing performance.
(g) Charges related to the closure of
quarter of fiscal 2019, which we do not consider in our evaluation of ongoing
performance.
(h) Other adjustments include amounts our management does not consider in our
evaluation of our ongoing operations, including certain severance and other
charges.
(4) Adjusted net income and adjusted net income per common share - diluted have
been presented in this Quarterly Report on Form 10-Q as supplemental measures
of financial performance that are not required by, or presented in accordance
with, GAAP. We define adjusted net income as net income before restructuring
charges, loss on extinguishment of debt, certain gains on disposal of assets,
certain management transition costs incurred and benefits realized, charges
incurred as part of the implementation of our Optimization Plan, charges
associated with an Elfa manufacturing facility closure, charges related to
the closure of
adjustments and other unusual or infrequent tax items. We define adjusted net
income per common share - diluted as adjusted net income divided by the
diluted weighted average common shares outstanding. We use adjusted netincome and adjusted net income per common share - diluted to supplement GAAP
measures of performance to evaluate the effectiveness of our business
strategies, to make budgeting decisions and to compare our performance
against that of other peer companies using similar measures. We present
adjusted net income and adjusted net income per common share - diluted
because we believe they assist investors in comparing our performance across
reporting periods on a consistent basis by excluding items that we do not
believe are indicative of our core operating performance and because webelieve it is useful for investors to see the measures that management uses
to evaluate the Company.
A reconciliation of the GAAP financial measures of net income and net income per
common share - diluted to the non-GAAP financial measures of adjusted net income
and adjusted net income per common share - diluted is set forth below:
Thirteen Weeks Ended Thirty-Nine Weeks Ended
December 28, December 29, December 28, December 29,
2019 2018 2019 2018
Numerator:
Net income $ 2,412 $ 9,321 $ 1,959 $ 5,798
Loss on extinguishment of debt (a) - - - 2,082
Elfa France closure (b) (1) - 402 -
Gain on disposal of real estate (c) - (387) - (387)
Optimization Plan implementation charges (d) - - - 4,864
Taxes (e) - (5,391) (112) (8,078)
Adjusted net income $ 2,411 $ 3,543 $ 2,249 $ 4,279
Denominator:
Weighted-average common shares outstanding -
diluted 48,370,418 48,381,455 49,172,633 48,407,337
Net income per common share - diluted$ 0.05 $
0.19
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(a) Loss recorded as a result of the amendments made to the Senior Secured Term
Loan Facility in
of our ongoing operations.
(b) Charges related to the closure of
quarter of fiscal 2019, which we do not consider in our evaluation of ongoing
performance.
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(c) Gain recorded as a result of the sale of a building in Lahti,
fiscal 2018, recorded in gain on disposal of assets, which we do not consider
in our evaluation of our ongoing operations.
(d) Charges incurred to implement our Optimization Plan, which include certain
consulting costs recorded in SG&A in the first quarter of fiscal 2018, which
we do not consider in our evaluation of ongoing performance.
(e) Tax impact of adjustments to net income, the tax impact related to the
closure of
tax benefit recorded in the first quarter of fiscal 2018 as a result of a
reduction in the Swedish tax rate, and the tax benefit recorded in the third
quarter of fiscal 2018 as a result of the finalization of the impact of the
Tax Cuts and Jobs Act, which are considered to be unusual or infrequent tax
items, all of which we do not consider in our evaluation of ongoing
performance.
Thirteen Weeks Ended
Net sales
The following table summarizes our net sales for each of the thirteen weeks
ended
December 28, 2019 % total December 29, 2018 % total
TCS net sales $ 211,971 92.7 % $ 204,899 92.4 %
Elfa third party net sales 16,686 7.3 % 16,738 7.6 %
Net sales $ 228,657 100.0 % $ 221,637 100.0 %
Net sales in the thirteen weeks ended December 28, 2019 increased by $7,020 , or
3.2%, compared to the thirteen weeks ended December 29, 2018 . This increase was
comprised of the following components:
Net sales
Net sales for the thirteen weeks ended December 29, 2018 $ 221,637
Incremental net sales increase (decrease) due to:
Comparable stores (including a
6,119
New stores
879
Elfa third party net sales (excluding impact of foreign currency translation)
1,011
Impact of foreign currency translation on Elfa third party net sales
(1,063)
Shipping and delivery
74
Net sales for the thirteen weeks ended December 28, 2019$ 228,657 In the thirteen weeks endedDecember 28, 2019 , comparable stores generated a$6,119 , or 3.0% increase in net sales, with Customs Closets contributing 420 basis points of the increase and all other departments negatively contributing 120 basis points. Additionally, new stores generated$879 of incremental net sales. Elfa third party net sales decreased$52 in the thirteen weeks endedDecember 28, 2019 . After converting Elfa's third party net sales from Swedish krona toU.S. dollars using the prior year's conversion rate for both the thirteen weeks endedDecember 28, 2019 and the thirteen weeks endedDecember 29, 2018 , Elfa third party net sales increased$1,011 . Gross profit and gross margin Gross profit in the thirteen weeks endedDecember 28, 2019 increased by$4,308 , or 3.3%, compared to the thirteen weeks endedDecember 29, 2018 . The increase in gross profit was primarily the result of increased consolidated net sales and consolidated gross margin. The following table summarizes the gross margin for the thirteen weeks ended 26 Table of ContentsDecember 28, 2019 andDecember 29, 2018 by segment and total. The segment gross margins include the impact of inter-segment net sales from the Elfa segment to the TCS segment: December 28, 2019 December 29, 2018 TCS gross margin 57.6 % 58.4 % Elfa gross margin 37.7 % 32.4 % Total gross margin 58.8 % 58.7 % TCS gross margin decreased 80 basis points primarily due to successful marketing and merchandising campaigns that drove a higher mix of lower margin service sales, partially offset by an improvement in foreign currency. Elfa gross margin increased 530 basis points primarily due to lower direct material costs and production efficiencies. In total, gross margin increased 10 basis points primarily due to the improvements in Elfa's gross margin during the thirteen weeks endedDecember 28, 2019 .
Selling, general and administrative expenses
Selling, general and administrative expenses in the thirteen weeks endedDecember 28, 2019 increased by$3,284 , or 3.0%, compared to the thirteen weeks endedDecember 29, 2018 . As a percentage of consolidated net sales, SG&A was flat as compared to the thirteen weeks endedDecember 29, 2018 . The following table summarizes SG&A as a percentage of consolidated net sales for the thirteen weeks endedDecember 28, 2019 andDecember 29, 2018 : December 28, 2019 December 29, 2018 % of Net sales % of Net sales TCS selling, general and administrative 45.4 % 45.4 % Elfa selling, general and administrative 3.6 % 3.6 % Total selling, general and administrative 49.0 % 49.0 % TCS selling, general and administrative expenses as a percentage of consolidated net sales was flat primarily due to incremental Custom Closets marketing expenses, offset by leverage of fixed payroll and occupancy costs due to higher sales. Pre-opening costs Pre-opening costs increased to$2,482 in the third quarter of fiscal 2019 as compared to$691 in the third quarter of fiscal 2018. The increase is primarily due to$2,182 of net costs associated with the opening of the second distribution center. The company opened one relocation store in the third quarter of fiscal 2019 as compared to opening two relocation stores in the third quarter of fiscal 2018. Interest expense
Interest expense decreased by
Taxes The provision for income taxes in the thirteen weeks endedDecember 28, 2019 was$1,886 as compared to a benefit of$3,926 in the thirteen weeks endedDecember 29, 2018 . The effective tax rate for the thirteen weeks endedDecember 28, 2019 was 43.9%, as compared to -72.8% in the thirteen weeks endedDecember 29, 2018 . The increase in the effective tax rate is primarily due to the benefit of the finalization of the one-time transition tax on foreign earnings in the third quarter of fiscal 2018. 27
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Thirty-Nine Weeks Ended
Net sales
The following table summarizes our net sales for each of the thirty-nine weeks
ended
December 28, 2019 % total December 29, 2018 % total
TCS net sales $ 628,282 93.1 % $ 593,896 92.5 %
Elfa third party net sales 46,327 6.9 % 48,017 7.5 %
Net sales $ 674,609 100.0 % $ 641,913 100.0 %
Net sales in the thirty-nine weeks ended
Net sales
Net sales for the thirty-nine weeks ended December 29, 2018 $ 641,913
Incremental net sales increase (decrease) due to:
Comparable stores (including a
31,069
New stores
2,535
Elfa third party net sales (excluding impact of foreign currency translation)
1,760
Impact of foreign currency translation on Elfa third party net sales
(3,449)
Shipping and delivery
781
Net sales for the thirty-nine weeks ended December 28, 2019$ 674,609 In the thirty-nine weeks endedDecember 28, 2019 , comparable stores generated a$31,069 , or 5.3% increase in net sales, with Customs Closets contributing 440 basis points of the increase and all other departments contributing 90 basis points. Additionally, new stores generated$2,535 of incremental net sales. Elfa third party net sales decreased$1,689 in the thirty-nine weeks endedDecember 28, 2019 , due to the negative impact of foreign currency translation. After converting Elfa's third party net sales from Swedish krona toU.S. dollars using the prior year's conversion rate for both the thirty-nine weeks endedDecember 28, 2019 and thirty-nine weeks endedDecember 29, 2018 , Elfa third party net sales increased$1,760 . Gross profit and gross margin
Gross profit in the thirty-nine weeks ended
The increase in gross profit was primarily the result of increased consolidated net sales, partially offset by a decrease in consolidated gross margin. The following table summarizes the gross margin for the thirty-nine weeks endedDecember 28, 2019 andDecember 29, 2018 by segment and total. The segment gross margins include the impact of inter-segment net sales from the Elfa segment to the TCS segment: December 28, 2019 December 29, 2018 TCS gross margin 57.3 % 58.0 % Elfa gross margin 36.7 % 34.5 % Total gross margin 58.0 % 58.5 % TCS gross margin decreased 70 basis points primarily due to successful marketing and merchandising campaigns that drove a higher mix of lower margin service sales, partially offset by an improvement in foreign currency. Elfa gross margin increased 220 basis points primarily due to production efficiencies and lower direct materials costs. In total, gross margin decreased 50 basis points primarily due to the decline in TCS's gross margin during the thirty-nine weeks endedDecember 28, 2019 . 28 Table of Contents
Selling, general and administrative expenses
Selling, general and administrative expenses in the thirty-nine weeks endedDecember 28, 2019 increased by$13,332 , or 4.2%, compared to the thirty-nine weeks endedDecember 29, 2018 . As a percentage of consolidated net sales, SG&A decreased by 40 basis points. The following table summarizes SG&A as a percentage of consolidated net sales for the thirty-nine weeks endedDecember 28, 2019 andDecember 29, 2018 : December 28, 2019 December 29, 2018 % of Net sales % of Net sales TCS selling, general and administrative 46.2 % 46.4 % Elfa selling, general and administrative 3.4 % 3.6 % Total selling, general and administrative 49.6 % 50.0 % TCS selling, general and administrative expenses decreased by 20 basis points as a percentage of consolidated net sales. This was primarily due to Optimization Plan expenses incurred in the thirty-nine weeks endedDecember 29, 2018 , partially offset by incremental Custom Closets marketing expenses incurred in the thirty-nine weeks endedDecember 28, 2019 . Elfa selling, general and administrative expenses decreased by 20 basis points as a percentage of consolidated net sales, primarily due to ongoing savings and efficiency efforts. Pre-opening costs
Pre-opening costs increased to
Interest expense Interest expense decreased by$5,048 , or 23.7%, in the thirty-nine weeks endedDecember 28, 2019 to$16,245 , as compared to$21,293 in the thirty-nine weeks endedDecember 29, 2018 . This decrease is primarily due to lower interest rates on the Senior Secured Term Loan Facility. Taxes The provision for income taxes in the thirty-nine weeks endedDecember 28, 2019 was$1,428 as compared to a benefit of$5,989 in the thirty-nine weeks endedDecember 29, 2018 . The effective tax rate for the thirty-nine weeks endedDecember 28, 2019 was 42.2%, as compared to 3135.6% in the thirty-nine weeks endedDecember 29, 2018 . The decrease in the effective tax rate is primarily due to the benefit of the remeasurement of deferred tax balances in the first quarter of fiscal 2018 as a result of a change in the Swedish tax rate and the benefit of the finalization of the one-time transition tax on foreign earnings in the third quarter of fiscal 2018. Liquidity and Capital Resources We have relied on cash flows from operations, a$100,000 asset-based revolving credit agreement (the "Revolving Credit Facility" as further discussed under "Revolving Credit Facility" below), and the 2019 Elfa Senior Secured Credit Facilities (as defined below) as our primary sources of liquidity. Our primary cash needs are for merchandise inventories, direct materials, payroll, store leases, capital expenditures associated with opening new stores and updating existing stores, as well as information technology and infrastructure, including building our second distribution center, and Elfa manufacturing facility enhancements. The most significant components of our operating assets and liabilities are merchandise inventories, accounts receivable, prepaid expenses and other assets, accounts payable, operating lease assets and liabilities, other current and noncurrent liabilities, taxes receivable and taxes payable. Our liquidity fluctuates as a result of our building inventory for key selling periods, and as a result, our borrowings are generally higher during 29
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these periods when compared to the rest of our fiscal year. Our borrowings generally increase in our second and third fiscal quarters as we prepare for Our Annual Shelving Sale, the holiday season, and Our Annual elfa® Sale. We believe that cash expected to be generated from operations and the availability of borrowings under the Revolving Credit Facility and the 2019 Elfa Senior Secured Credit Facilities will be sufficient to meet liquidity requirements, anticipated capital expenditures, and payments due under our existing credit facilities for at least the next 12 months. In the future, we may seek to raise additional capital, which could be in the form of loans, bonds, convertible debt or equity, to fund our operations and capital expenditures. There can be no assurance that we will be able to raise additional capital on favorable terms or at all. AtDecember 28, 2019 , we had$13,971 of cash, of which$5,935 was held by our foreign subsidiaries. In addition, we had$38,352 of additional availability under the Revolving Credit Facility and approximately$11,774 of additional availability under the 2019 Elfa Revolving Credit Facility (as defined below) as ofDecember 28, 2019 . There were$4,276 in letters of credit outstanding under the Revolving Credit Facility and other contracts at that date. Cash flow analysis A summary of our key components and measures of liquidity are shown in the following table: Thirty-Nine Weeks Ended December 28, December 29, 2019 2018 Net cash (used in) provided by operating activities$ (1,136) $ 17,823 Net cash used in investing activities (29,284) (20,413) Net cash provided by financing activities 36,751 15,737 Effect of exchange rate changes on cash 276 (577) Net increase in cash$ 6,607 $ 12,570 Free cash flow (Non-GAAP) (1)$ (30,432) $ (3,505)
--------------------------------------------------------------------------------
(1) See below for a discussion of this non-GAAP financial measure and
reconciliation to its most directly comparable GAAP financial measure.
Net cash (used in) provided by operating activities
Cash from operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization, stock-based compensation, and deferred taxes as well as the effect of changes in operating assets and liabilities. Net cash used in operating activities was$1,136 for the thirty-nine weeks endedDecember 28, 2019 . Non-cash items of$27,260 and net income of$1,959 were more than offset by a net change in operating assets and liabilities of$30,355 . The net change in operating assets and liabilities is primarily due to an increase in merchandise inventory, combined with an increase in accounts receivable, partially offset by an increase in accounts payable and accrued liabilities. The increase in merchandise inventory is primarily due to inventory build-up related to the second distribution center and new product introductions. The increase in accounts receivable is primarily due to the seasonality of sales. The increase in accounts payable and accrued liabilities is primarily driven by timing of inventory receipts and payments. Net cash provided by operating activities was$17,823 for the thirty-nine weeks endedDecember 29, 2018 . Non-cash items of$29,029 and net income of$5,798 were partially offset by a net change in operating assets and liabilities of$17,004 . The net change in operating assets and liabilities is primarily due to an increase in merchandise inventory, partially offset by an increase in accounts payable and accrued liabilities during the thirty-nine weeks endedDecember 29, 2018 . 30 Table of Contents
Net cash used in investing activities
Investing activities consist primarily of capital expenditures for new store openings, existing store remodels, infrastructure, information systems, and our distribution centers. Our total capital expenditures for the thirty-nine weeks endedDecember 28, 2019 were$29,296 . We incurred capital expenditures of$13,434 related to the opening of the second distribution center inAberdeen, Maryland , which is expected to be fully operational in late fiscal 2019. We incurred$9,249 of capital expenditures for new store openings, relocations and existing store remodels. We opened two new stores, including one relocation, during the thirty-nine weeks endedDecember 28, 2019 . The remaining capital expenditures of$6,613 were primarily for investments in information technology and new product rollouts. Our total capital expenditures for the thirty-nine weeks endedDecember 29, 2018 were$21,328 with new store openings, relocations and existing store remodels accounting for less than half of spending at$8,703 . We opened four stores, including two relocations, during the thirty-nine weeks endedDecember 29, 2018 . We incurred$5,674 of capital expenditures for distribution centers, the majority of which is related to the second distribution center. The remaining capital expenditures of$6,951 were primarily for investments in information technology and new product rollouts. We recorded proceeds from the sale of property, plant and equipment of$915 , the majority of which is related to a sale of a building in Lahti,Finland in the third quarter of fiscal 2018.
Net cash provided by financing activities
Financing activities consist primarily of borrowings and payments under the Senior Secured Term Loan Facility, the Revolving Credit Facility, and the 2019 Elfa Senior Secured Credit Facilities.
Net cash provided by financing activities was$36,751 for the thirty-nine weeks endedDecember 28, 2019 . This included net proceeds of$46,000 from borrowings under the Revolving Credit Facility, partially offset by net repayments of$5,365 for the 2019 Elfa Senior Secured Credit Facilities, payments of$3,512 for repayment of long-term indebtedness, and$372 for taxes paid with the withholding of shares upon vesting of restricted stock awards. Net cash provided by financing activities was$15,737 for the thirty-nine weeks endedDecember 29, 2018 . This included net proceeds of$42,000 from borrowings under the Revolving Credit Facility, partially offset by net payments of$23,751 for repayment of long-term indebtedness, debt issuance costs of$2,384 , and$128 for taxes paid with the withholding of shares upon vesting of restricted stock awards.
As of
As of
Free cash flow (Non-GAAP)
We present free cash flow, which we define as net cash (used in) provided by
operating activities in a period minus payments for property and equipment made
in that period, because we believe it is a useful indicator of the Company's
overall liquidity, as the amount of free cash flow generated in any period is
representative of cash that is available for debt repayment, investment, and
other discretionary and non-discretionary cash uses. Accordingly, we believe
that free cash flow provides useful information to investors in understanding
and evaluating our liquidity in the same manner as management. Our definition of
free cash flow is limited in that it does not solely represent residual cash
flows available for discretionary expenditures due to the fact that the measure
does not deduct the payments required for debt service and other contractual
obligations. Therefore, we believe it is important to view free cash flow as a
measure that provides supplemental information to our Consolidated Statements of
Cash Flows. Although other companies report their free cash flow, numerous
methods may exist for calculating a company's free cash flow. As a result, the
method used by our
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management to calculate our free cash flow may differ from the methods used by other companies to calculate their free cash flow.
Our free cash flow fluctuates as a result of seasonality of net sales, building inventory for key selling periods, and timing of investments in new store openings, existing store remodels, infrastructure, information systems, and our distribution centers, among other things. Historically, our free cash flow has been lower in the first half of the fiscal year, due to lower net sales, operating income, and cash flows from operations, and as such, is not necessarily indicative of the free cash flow for the full year. Our free cash flow of -$30,432 for the thirty-nine weeks endedDecember 28, 2019 has decreased as compared to-$3,505 for the thirty-nine weeks endedDecember 29, 2018 , due to significant investments in our second distribution center during the thirty-nine weeks endedDecember 28, 2019 . We do expect our free cash flow to increase in fiscal 2020 as our significant investments for the opening of the second distribution center are expected to be completed once it is fully operational. The following table sets forth a reconciliation of free cash flow, a non-GAAP financial measure, to net cash (used in) provided by operating activities, which we believe to be the GAAP financial measure most directly comparable to free cash flow: Thirty-Nine Weeks Ended December 28, December 29, 2019 2018 Net cash (used in) provided by operating activities$ (1,136) $ 17,823 Less: Additions to property and equipment (29,296) (21,328) Free cash flow$ (30,432) $ (3,505)
Senior Secured Term Loan Facility
OnApril 6, 2012 ,The Container Store Group, Inc. ,The Container Store, Inc. and certain of our domestic subsidiaries entered into a credit agreement withJPMorgan Chase Bank, N.A ., as Administrative Agent and Collateral Agent, and the lenders party thereto (the "Senior Secured Term Loan Facility"). OnSeptember 14, 2018 (the "Effective Date"), the Company entered into a Fifth Amendment to the Senior Secured Term Loan Facility. The Fifth Amendment amended the Senior Secured Term Loan Facility to, among other things, (i) extend the maturity date of the loans under the Senior Secured Term Loan Facility toSeptember 14, 2023 , (ii) decrease the applicable interest rate margin to 5.00% for LIBOR loans and 4.00% for base rate loans and, beginning from the date that a compliance certificate is delivered to the administrative agent for the fiscal year endedMarch 30, 2019 , allow the applicable interest rate margin to step down to 4.75% for LIBOR loans and 3.75% for base rate loans upon achievement of a consolidated leverage ratio equal to or less than 2.75:1.00, and (iii) impose a 1.00% premium if a voluntary prepayment is made from the proceeds of a repricing transaction within 12 months after the Effective Date. In connection with the Fifth Amendment, we repaid$20,000 of the outstanding loans under the Senior Secured Term Loan Facility, which reduced the aggregate principal amount of the Senior Secured Term Loan Facility to$272,500 . We drew down a net amount of approximately$10,000 on the Revolving Credit Facility in connection with the closing of the Fifth Amendment. As ofDecember 28, 2019 , the aggregate principal amount in outstanding borrowings under the Senior Secured Term Loan Facility was$253,985 and the interest rate on such borrowings is LIBOR +5.00%, subject to a LIBOR floor of 1.00%. The Senior Secured Term Loan Facility provides that we are required to make quarterly principal repayments of$1,703 throughJune 30, 2023 , with a balloon payment for the remaining balance due onSeptember 14, 2023 . The Senior Secured Term Loan Facility is secured by (a) a first priority security interest in substantially all of our assets (excluding stock in foreign subsidiaries in excess of 65%, assets of non-guarantors and subject to certain other exceptions) (other than the collateral that secures the Revolving Credit Facility described below on a first-priority basis) and (b) a second priority security interest in the assets securing the Revolving Credit Facility described below on a first-priority basis. Obligations under the Senior Secured Term Loan Facility are guaranteed byThe Container Store Group, Inc. and each ofThe Container Store, Inc.'s U.S. subsidiaries. The Senior Secured Term Loan Facility contains a number of covenants that, among other things, restrict our ability, subject to specified exceptions, to incur additional 32
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debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves, engage in businesses that are not in a related line of business; make loans, advances or guarantees; engage in transactions with affiliates; and make investments. In addition, the financing agreements contain certain cross-default provisions and also require certain mandatory prepayments of the Senior Secured Term Loan Facility, among these an Excess Cash Flow (as such term is defined in the Senior Secured Term Loan Facility) requirement. As ofDecember 28, 2019 , we were in compliance with all covenants under the Senior Secured Term Loan Facility and no Event of Default (as such term is defined in the Senior Secured Term Loan Facility) had occurred. Revolving Credit Facility OnApril 6, 2012 ,The Container Store Group, Inc. ,The Container Store, Inc. and certain of our domestic subsidiaries entered into an asset-based revolving credit agreement with the lenders party thereto,JPMorgan Chase Bank, N.A ., as Administrative Agent and Collateral Agent, andWells Fargo Bank, National Association , as Syndication Agent (as amended, the "Revolving Credit Facility"). The maturity date of the loans under the Revolving Credit Facility isAugust 18, 2022 . The aggregate principal amount of the facility is$100,000 . Borrowings under the Revolving Credit Facility accrue interest at LIBOR+1.25%. In addition, the Revolving Credit Facility includes an uncommitted incremental revolving facility in the amount of$50,000 , which is subject to receipt of lender commitments and satisfaction of specified conditions. The Revolving Credit Facility provides that proceeds are to be used for working capital and other general corporate purposes, and allows for swing line advances of up to$15,000 and the issuance of letters of credit of up to$40,000 . The availability of credit at any given time under the Revolving Credit Facility is limited by reference to a borrowing base formula based upon numerous factors, including the value of eligible inventory, eligible accounts receivable, and reserves established by the administrative agent. As a result of the borrowing base formula, the actual borrowing availability under the Revolving Credit Facility could be less than the stated amount of the Revolving Credit Facility (as reduced by the actual borrowings and outstanding letters of credit under the Revolving Credit Facility). The Revolving Credit Facility is secured by (a) a first-priority security interest in substantially all of our personal property, consisting of inventory, accounts receivable, cash, deposit accounts, and other general intangibles, and (b) a second-priority security interest in the collateral that secures the Senior Secured Term Loan Facility on a first-priority basis, as described above (excluding stock in foreign subsidiaries in excess of 65%, and assets of non-guarantor subsidiaries and subject to certain other exceptions). Obligations under the Revolving Credit Facility are guaranteed byThe Container Store Group, Inc. and each ofThe Container Store, Inc.'s U.S. subsidiaries. The Revolving Credit Facility contains a number of covenants that, among other things, restrict our ability, subject to specified exceptions, to incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves, engage in businesses that are not in a related line of business; make loans, advances or guarantees; engage in transactions with affiliates; and make investments. In addition, the financing agreements contain certain cross-default provisions. We are required to maintain a consolidated fixed-charge coverage ratio of 1.0 to 1.0 if excess availability is less than$10,000 at any time. As ofDecember 28, 2019 , we were in compliance with all covenants under the Revolving Credit Facility and no Event of Default (as such term is defined in the Revolving Credit Facility) had occurred.
2019 Elfa Senior Secured Credit Facilities
OnMarch 18, 2019 , Elfa refinanced its master credit agreement withNordea Bank AB entered into onApril 1, 2014 and the senior secured credit facilities thereunder, and entered into a new master credit agreement with Nordea Bank Abp, filial i Sverige ("Nordea Bank "), which consists of (i) anSEK 110.0 million (approximately$11,774 as ofDecember 28, 2019 ) revolving credit facility (the "2019 Original Revolving Facility"), (ii) upon Elfa's request, an additionalSEK 115.0 million (approximately$12,309 as ofDecember 28, 2019 ) revolving credit facility (the "2019 Additional Revolving Facility" and together with the 2019 Original Revolving Facility, the "2019 Elfa Revolving Facilities"), and 33
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(iii) an uncommitted term loan facility in the amount ofSEK 25.0 million (approximately$2,676 as ofDecember 28, 2019 ), which is subject to receipt ofNordea Bank's commitment and satisfaction of specified conditions (the "Incremental Term Facility", together with the 2019 Elfa Revolving Facilities, the "2019 Elfa Senior Secured Credit Facilities"). The term for the 2019 Elfa Senior Secured Credit Facilities began onApril 1, 2019 and matures onApril 1, 2024 . Loans borrowed under the 2019 Elfa Revolving Facilities bear interest atNordea Bank's base rate +1.40%. Any loan borrowed under the Incremental Term Facility would bear interest at Stibor +1.70%. The 2019 Elfa Senior Secured Credit Facilities are secured by the majority of assets of Elfa. The 2019 Elfa Senior Secured Credit Facilities contains a number of covenants that, among other things, restrict Elfa's ability, subject to specified exceptions, to incur additional liens, sell or dispose of assets, merge with other companies, engage in businesses that are not in a related line of business and make guarantees. In addition, Elfa is required to maintain (i) a Group Equity Ratio (as defined in the 2019 Elfa Senior Secured Credit Facilities) of not less than 32.5% and (ii) a consolidated ratio of net debt to EBITDA (as defined in the 2019 Elfa Senior Secured Credit Facilities) of less than 3.20. As ofDecember 28, 2019 , Elfa was in compliance with all covenants under the 2019 Elfa Senior Secured Credit Facilities and no Event of Default (as defined in the 2019 Elfa Senior Secured Credit Facilities) had occurred. Critical accounting policies and estimates The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. A summary of our significant accounting policies is included in Note 1 to our annual consolidated financial statements in our Annual Report on Form 10-K for the fiscal year endedMarch 30, 2019 , filed with theSEC onMay 30, 2019 . Certain of our accounting policies and estimates are considered critical, as these policies and estimates are the most important to the depiction of our consolidated financial statements and require significant, difficult, or complex judgments, often about the effect of matters that are inherently uncertain. Such policies are summarized in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our Annual Report on Form 10-K for the fiscal year endedMarch 30, 2019 , filed with theSEC onMay 30, 2019 . As ofDecember 28, 2019 , there were no significant changes to any of our critical accounting policies and estimates, with the exception of the adoption of ASU 2016-02, Leases, which is updated below.
Leases
We recognize a lease liability upon lease commencement, measured at the present value of the fixed future minimum lease payments over the lease term. We have elected the practical expedient to not separate lease and non-lease components. Therefore, lease payments included in the measurement of the lease liability include all fixed payments in the lease arrangement. We record a right-of-use asset for an amount equal to the lease liability, increased for any prepaid lease costs and initial direct costs and reduced by any lease incentives. We remeasure the lease liability and right-of-use asset when a change to our future minimum lease payments occurs. Lease expense on operating leases is recorded on a straight-line basis over the term of the lease and is recorded in SG&A. Key assumptions and judgments included in the determination of the lease liability include the discount rate applied to the present value of the future lease payments, and the exercise of renewal options. Our leases do not provide information about the rate implicit in the lease; therefore, we utilize an incremental borrowing rate to calculate the present value of our future lease obligations. The incremental borrowing rate represents the rate of interest we would have to pay on a collateralized borrowing, for an amount equal to the lease payments, over a similar term and in a similar economic environment. Additionally, many of our leases contain renewal options. The option periods are generally not included in the lease term used to measure our lease liabilities and right-of-use assets upon commencement as exercise of the options is not reasonably certain. We remeasure the lease liability and right-of-use asset when we are reasonably certain to exercise a renewal option.
For further discussion about leases see Note 1 and Note 3 in the Notes to consolidated financial statements.
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Contractual obligations
There have been no material changes to our contractual obligations as disclosed
in our Annual Report on Form 10-K for the fiscal year ended March 30, 2019 ,
filed with the SEC on May 30, 2019 , other than those which occur in the normal
course of business.
Off-Balance Sheet Arrangements
There have been no material changes to our off-balance sheet arrangements as
disclosed in our Annual Report on Form 10-K for the fiscal year ended March 30,
2019 , filed with the SEC on May 30, 2019 .
Recent Accounting Pronouncements
Please refer to Note 1 of our unaudited consolidated financial statements for a summary of recent accounting pronouncements.
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