COPPELL, Texas - The Container Store Group, Inc. (NYSE: TCS) (the 'Company'), today announced financial results for the third quarter of fiscal 2019 ended December 28, 2019.
Consolidated net sales were $228.7 million, up 3.2%. Net sales in The Container Store retail business ('TCS') were $212.0 million, up 3.5%. Elfa International AB ('Elfa') third-party net sales were $16.7 million, consistent with the prior year period, however, excluding the impact of foreign currency translation, Elfa third-party sales were up 6.6%.
Comparable store sales increased 3.0%, with Custom Closets up 10.2%, contributing 420 basis points of the increase in comparable store sales, and all other product categories were down 2.0%, negatively contributing the remaining 120 basis points. The decline in other product categories was more than entirely driven by an expected decrease in holiday departments' sales, which declined 12.2% and negatively contributed 200 basis points.
Consolidated net income and net income per share ('EPS') was $2.4 million and $0.05 compared to net income of $9.3 million and $0.19, respectively, in the third quarter of fiscal 2018. Adjusted net income per share ('Adjusted EPS') was $0.05 compared to $0.07 in the third quarter of fiscal 2018 (see Reconciliation of GAAP to Non-GAAP Financial Measures table). Third quarter fiscal 2019 EPS includes approximately $0.04 per share in investments related to the second distribution center and incremental Custom Closets marketing.
Melissa Reiff, Chief Executive Officer commented, 'We are very pleased to deliver a strong third quarter performance which was largely in line with our expectations, as we continued to successfully execute against our number one strategic priority; to grow our Custom Closets business. As we expected, sales in our holiday departments declined compared to last year, but our focus on our everyday products and solutions during the holiday period more than offset the holiday departments' sales challenges. We continue to make changes to profitably maximize this portion of our offering going forward.'
Ms. Reiff continued, 'We are focused on the execution of our strategic priorities and we are making good progress against each of them. We are just beginning to realize the benefits of our investment in our new distribution center including the associated freight savings, as well as significant improvements in customer delivery times, which are expected to ramp up as we move into fiscal 2020. Our marketing investments to expand awareness of our Custom Closets offerings and capabilities are also driving the desired outcomes. We look forward to continuing to capitalize on the opportunities to grow our share of this estimated $6 billion Custom Closets addressable market, and enter the final quarter of our fiscal year in a strong position to deliver against our previously provided outlook.'
Third Quarter Fiscal 2019 Results
For the third quarter (thirteen weeks) ended December 28, 2019:
Consolidated net sales were $228.7 million, up 3.2% as compared to the third quarter of fiscal 2018. Net sales at TCS were $212.0 million, up 3.5%, driven by an increase in comparable store sales of 3.0%, combined with incremental sales from new stores. Elfa third-party net sales were $16.7 million, consistent with the third quarter of fiscal 2018, however, excluding the impact of foreign currency translation, Elfa third-party sales were up 6.6%.
Consolidated gross margin was 58.8%, an increase of 10 basis points, compared to the third quarter of fiscal 2018. TCS gross margin decreased 80 basis points to 57.6%, primarily due to successful marketing and merchandising campaigns that drove a higher mix of lower margin service sales in the third quarter of fiscal 2019. The decrease was partially offset by improvement in foreign currency. Elfa gross margin increased 530 basis points primarily due to lower direct material costs and production efficiencies. Consolidated gross margin improved 10 basis points primarily due to the improvements in Elfa's gross margin during the third quarter of fiscal 2019.
Consolidated selling, general and administrative expenses ('SG&A') increased by 3.0% to $112.0 million in the third quarter of fiscal 2019 from $108.7 million in the third quarter of fiscal 2018. SG&A as a percentage of 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 increased to $2.5 million in the third quarter of fiscal 2019 as compared to $0.7 million in the third quarter of fiscal 2018. The increase is primarily due to $2.2 million 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.
Consolidated net interest expense decreased 14.5% to $5.1 million in the third quarter of fiscal 2019 from $6.0 million in the third quarter of fiscal 2018. The decrease is primarily due to lower interest rates, combined with a lower principal balance on the Senior Secured Term Loan Facility (the 'Term Loan Facility').
The effective tax rate was 43.9% in the third quarter of fiscal 2019, as compared to -72.8% in the third quarter of fiscal 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.
Net income was $2.4 million, or $0.05 per share, in the third quarter of fiscal 2019 compared to net income of $9.3 million, or $0.19 per share in the third quarter of fiscal 2018. Adjusted net income was $2.4 million, or $0.05 per share, in the third quarter of fiscal 2019 compared to adjusted net income of $3.5 million, or $0.07 per share in the third quarter of fiscal 2018 (see Reconciliation of GAAP to Non-GAAP Financial Measures table).
Adjusted EBITDA (see Reconciliation of GAAP to Non-GAAP Financial Measures table) was $22.0 million in the third quarter of fiscal 2019 compared to $21.8 million in the third quarter of fiscal 2018.
For the year-to-date (thirty-nine weeks) ended December 28, 2019:
Consolidated net sales were $674.6 million, up 5.1% as compared to the thirty-nine weeks ended December 29, 2018. Net sales at TCS were $628.3 million, up 5.8%, compared to the thirty-nine weeks ended December 29, 2018, with the increase driven by a comparable store sales increase of 5.3%, as well as incremental sales from new stores. Elfa third-party net sales were $46.3 million, down 3.4% compared to the thirty-nine weeks ended December 29, 2018, due to the negative impact of foreign currency translation.
Consolidated gross margin was 58.0%, a decrease of 50 basis points compared to the thirty-nine weeks ended December 29, 2018. TCS gross margin decreased 70 basis points to 57.3%, primarily due to successful marketing and merchandising campaigns that drove a higher mix of lower margin service sales. The decrease was partially offset by improvement in foreign currency. Elfa gross margin increased 220 basis points primarily due to production efficiencies and lower direct materials costs. Consolidated gross margin declined 50 basis points primarily due to the decline in TCS's gross margin during the thirty-nine weeks ended December 28, 2019.
Consolidated SG&A increased by 4.2% to $334.3 million from $320.9 million in the thirty-nine weeks ended December 29, 2018. SG&A as a percentage of net sales decreased 40 basis points. This was primarily due to Optimization Plan expenses incurred in the thirty-nine weeks ended December 29, 2018, partially offset by incremental Custom Closets marketing expenses incurred in the thirty-nine weeks ended December 28, 2019.
Pre-opening costs increased to $6.0 million in the thirty-nine weeks ended December 28, 2019 as compared to $1.9 million in the thirty-nine weeks ended December 29, 2018. The increase is primarily due to $5.0 million of net costs associated with the opening of the second distribution center. The Company opened two new stores, including one relocation, in the thirty-nine weeks ended December 28, 2019 as compared to opening four new stores, including two relocations, in the thirty-nine weeks ended December 29, 2018.
Consolidated net interest expense decreased 23.7% to $16.2 million in the thirty-nine weeks ended December 28, 2019 from $21.3 million in the thirty-nine weeks ended December 29, 2018, primarily due to lower interest rates on the Term Loan Facility.
The effective tax rate was 42.2% in the thirty-nine weeks ended December 28, 2019, as compared to 3135.6% in the thirty-nine weeks ended December 29, 2018. The decrease in the effective tax rate is primarily due to the benefit for the remeasurement of deferred tax balances recorded 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.
Net income was $2.0 million, or $0.04 per share in the thirty-nine weeks ended December 28, 2019, as compared to net income of $5.8 million, or $0.12 per share in the thirty-nine weeks ended December 29, 2018. Adjusted net income was $2.2 million, or $0.05 per share in the thirty-nine weeks ended December 28, 2019, as compared to adjusted net income of $4.3 million, or $0.09 per share in the thirty-nine weeks ended December 29, 2018 (see Reconciliation of GAAP to Non-GAAP Financial Measures table).
Adjusted EBITDA (see Reconciliation of GAAP to Non-GAAP Financial Measures table) was $55.1 million in the thirty-nine weeks ended December 28, 2019 compared to $58.6 million in the thirty-nine weeks ended December 29, 2018. The decrease in Adjusted EBITDA was primarily due to incremental Custom Closets marketing expenses incurred in the first thirty-nine weeks of fiscal 2019.
Balance sheet and liquidity highlights: See detailed release at:
http://investor.containerstore.com/press-releases/press-release-details/2020/The-Container-Store-Group-Inc-Announces-Third-Quarter-Fiscal-2019-Financial-Results/default.aspx
THE CONTAINER STORE GROUP, INC. 
