Container Store : Announces Second Quarter Fiscal 2020 Financial Results

The Container Store Group Announces Second Quarter Fiscal 2020 Financial Results.

Highlights:

* Consolidated net sales increase of 5.0%, inclusive of a 16.8% increase in the fiscal month of September

* Online sales increase of 86.4%

* Earnings per diluted share of $0.41 compared to $0.08 in second quarter of fiscal 2019

* Strong Year-to-Date Operating Cash Flow of $91.2 million and free cash flow* of $84.3 million

* Announces exclusive co-branded product collaboration with Marie Kondo

COPPELL - The Container Store Group, Inc. (NYSE: TCS) (the 'Company'), today announced financial results for the second quarter of fiscal 2020 ended September 26, 2020.

Consolidated net sales were $248.2 million, up 5.0%, inclusive of a 16.8% increase in the fiscal month of September. Net sales in The Container Store retail business ('TCS') were $233.0 million, up 5.3%. Online sales increased 86.4% in the second quarter of fiscal 2020. Elfa International AB ('Elfa') third-party net sales were $15.2 million, flat compared to the second quarter of fiscal 2019; however, excluding the impact of foreign currency translation, Elfa third-party net sales were down 6.6%.

Consolidated net income and net income per diluted share ('EPS') were $20.2 million and $0.41 compared to net income of $3.6 million and $0.08 in the second quarter of fiscal 2019. Adjusted net income per diluted share ('Adjusted EPS')* was $0.43 compared to $0.08 in the second quarter of fiscal 2019.

Adjusted EBITDA* nearly doubled to $44.1 million in the second quarter of fiscal 2020 compared to $22.4 million in the second quarter of fiscal 2019.

Net cash provided by operating activities was $91.2 million in the twenty-six weeks ended September 26, 2020 (the 'first half of fiscal 2020'), compared to $5.8 million in the twenty-six weeks ended September 28, 2019 (the 'first half of fiscal 2019'). Free cash flow* increased to $84.3 million compared to ($15.8) million in the first half of fiscal 2019.

Melissa Reiff, Chairwoman and Chief Executive Officer commented, 'We are thrilled to announce that we achieved the best second quarter sales, earnings and free cash flow in the Company's history. I am very proud of our second quarter results which reflect the significant strides we have made on our multi-year sales-driving initiatives across merchandising, marketing, stores and online. The hard work of our teams across the organization and disciplined execution of our strategic priorities enabled us to benefit from the current stay-at-home phenomenon created by today's environment. Our focus on increasing relevancy with our marketing and merchandising alliances resulted in the successful 2019 product and marketing partnership we forged with The Home Edit. This positioned us to capitalize on increased interest in the storage and organization category resulting from their recently premiered Netflix show in early September.'

Ms. Reiff continued, 'We continue to build our brand, broaden our appeal, increase our relevancy and fortify our position as the category leader. As outlined in our separate press release, we are delighted to announce our exclusive, elegant, and sustainably sourced collection of co-branded products with Marie Kondo, which is expected to be available in our stores and online beginning in January 2021. We believe these strategic partnerships with leading, innovative household names continue to ensure The Container Store remains top of mind when it comes to storage and organization and Custom Closets solutions.'

Ms. Reiff concluded, 'We believe that many of the key factors driving our strong second quarter performance have continued into the third quarter of fiscal 2020. As we look ahead, we are excited about the sales momentum we are driving and October trends to date have improved from September levels. While the macro backdrop remains uncertain, we are proud of our excellent execution and believe we are well positioned to continue capitalizing on the many opportunities that lie ahead.'

Second Quarter Fiscal 2020 Results

For the second quarter (thirteen weeks) ended September 26, 2020:

Consolidated net sales were $248.2 million, up 5.0% compared to the second quarter of fiscal 2019. TCS net sales were $233.0 million, an increase of 5.3%, with other product categories up 10.1%, contributing 550 basis points of the increase, and Custom Closets remaining almost flat. Our online sales increased 86.4% compared to the second quarter of fiscal 2019. Elfa third-party net sales were $15.2 million, flat compared to the second quarter of fiscal 2019; however, excluding the impact of foreign currency translation, Elfa third-party net sales were down 6.6%. The Company does not believe that comparable store sales is a meaningful metric to present in the second quarter of fiscal 2020 because all stores except one are considered comparable for purposes of the calculation; therefore, the calculated increase would be materially the same as the overall TCS net sales increase of 5.3%.

Consolidated gross margin was 58.8%, an increase of 90 basis points, compared to the second quarter of fiscal 2019. TCS gross margin increased 50 basis points to 57.5%, primarily due to less promotional activity and favorable mix of higher margin product sales in the second quarter of fiscal 2020, partially offset by increased shipping costs as a result of a higher mix of online sales. Elfa gross margin increased 380 basis points primarily due to favorable customer and product sales mix and to a lesser extent lower direct material costs.

Consolidated selling, general and administrative expenses ('SG&A') decreased by 11.2% to $101.2 million in the second quarter of fiscal 2020 from $114.0 million in the second quarter of fiscal 2019. SG&A as a percentage of net sales decreased 740 basis points primarily due to reductions in payroll, marketing costs, transportation costs and other expenses, combined with leverage of SG&A on higher sales during the quarter.

Pre-opening costs declined to $7.0 thousand in the second quarter of fiscal 2020 from $2.3 million in the second quarter of fiscal 2019 primarily due to $1.7 million of net costs associated with the opening of the second distribution center in the second quarter of fiscal 2019. The company did not open any new stores in the second quarter of fiscal 2020 and opened one new store in the second quarter of fiscal 2019.

Consolidated net interest expense decreased 16.9% to $4.5 million in the second quarter of fiscal 2020 from $5.4 million in the second quarter of fiscal 2019. The decrease is primarily due to lower interest rates, combined with a lower principal balance on the Senior Secured Term Loan Facility.

The effective tax rate was 31.0% in the second quarter of fiscal 2020, as compared to 26.8% in the second quarter of fiscal 2019. The increase in the effective tax rate is primarily due to the Company's jurisdictional mix of income and additional tax expense related to stock-based compensation.

Net income was $20.2 million, or $0.41 per diluted share, in the second quarter of fiscal 2020 compared to net income of $3.6 million, or $0.08 per diluted share in the second quarter of fiscal 2019. Adjusted net income* was $20.9 million, or $0.43 per diluted share, in the second quarter of fiscal 2020 compared to adjusted net income* of $3.9 million, or $0.08 per diluted share in the second quarter of fiscal 2019.

Adjusted EBITDA* was $44.1 million in the second quarter of fiscal 2020 compared to $22.4 million in the second quarter of fiscal 2019, driven by higher consolidated net sales, combined with consolidated gross margin expansion of 90 basis points and a 740 basis point improvement in SG&A as a percentage of consolidated net sales.

For the year-to-date (twenty-six weeks) ended September 26, 2020:

Consolidated net sales were $399.9 million, down 10.3% as compared to the first half of fiscal 2019. Net sales at TCS were $372.4 million, down 10.6%, compared to the first half of fiscal 2019 and Elfa third-party net sales were $27.5 million, down 7.1% compared to the first half of fiscal 2019. Declines in TCS and Elfa net sales were due to the negative impact of COVID-19 during the first quarter of fiscal 2020. As a result of the impact of the COVID-19 pandemic on our Company stores and the Company's policy of excluding extended store closures from its comparable sales calculation, the Company does not believe that comparable store sales is a meaningful metric to present for fiscal 2020.

Consolidated gross margin was 56.1%, a decrease of 140 basis points compared to the first half of fiscal 2019. TCS gross margin decreased 260 basis points to 54.6%, primarily due to increased shipping costs as a result of a higher mix of online sales and increased promotional activity, partially offset by a favorable mix of higher margin product sales. Elfa gross margin increased 490 basis points primarily due to favorable customer and product sales mix and to a lesser extent lower raw material prices.

Consolidated SG&A decreased by 15.7% to $187.5 million from $222.3 million in the first half of fiscal 2019. SG&A as a percentage of net sales decreased 300 basis points. The decrease was primarily due to reductions in payroll, marketing, and transportation costs, partially offset by the deleverage of occupancy costs in the first half of fiscal 2020.

Pre-opening costs declined to $16.0 thousand in the first half of fiscal 2020 from $3.5 million in the first half of fiscal 2019 primarily due to $2.8 million of net costs associated with the opening of the second distribution center in the first half of fiscal 2019. The Company opened no new stores in the first half of fiscal 2020 as compared to opening one new store in the first half of fiscal 2019.

Other expenses increased to $1.1 million in the first half of fiscal 2020 due to severance costs associated with the reduction in workforce as a result of the COVID-19 pandemic, as compared to $0.4 million for charges primarily related to the closure of Elfa France operations in the first half of fiscal 2019.

Consolidated net interest expense decreased 15.0% to $9.4 million in the first half of fiscal 2020 from $11.1 million in the first half of fiscal 2019. The decrease is primarily due to lower interest rates, combined with a lower principal balance on the Senior Secured Term Loan Facility.

The effective tax rate was 38.1%, as compared to 50.3% in the first half of fiscal 2019. The decrease in the effective tax rate is primarily due to a shift in the Company's jurisdictional mix of income, offset by an increase in state income tax rates on deferred balances.

Net income was $3.5 million, or $0.07 per diluted share, in the first half of fiscal 2020 compared to net loss of $0.5 million, or ($0.01) per diluted share in the first half of fiscal 2019. Adjusted net income* was $5.4 million, or $0.11 per diluted share, in the first half of fiscal 2020 compared to adjusted net loss* of $0.2 million, or $0.00 per diluted share in the first half of fiscal 2019.

Adjusted EBITDA* was $48.5 million in the first half of fiscal 2020 compared to $33.1 million in the first half of fiscal 2019.

Balance sheet and liquidity highlights:

http://investor.containerstore.com/press-releases/press-release-details/2020/The-Container-Store-Group-Inc.-Announces-Second-Quarter-Fiscal-2020-Financial-Results/default.aspx

(1) Cash plus availability on revolving credit facilities.

(2) Represents fiscal twenty-six week periods only. See Reconciliation of GAAP to Non-GAAP Financial Measures table.

Conference Call Information

A conference call to discuss second quarter fiscal 2020 financial results is scheduled for today, October 20, 2020, at 4:30 PM Eastern Time. Investors and analysts interested in participating in the call are invited to dial [phone] (international callers please dial [phone]) approximately 10 minutes prior to the start of the call. A live audio webcast of the conference call will be available online at investor.containerstore.com.

A taped replay of the conference call will be available within two hours of the conclusion of the call and can be accessed both online and by dialing [phone] (international callers please dial [phone]). The pin number to access the telephone replay is 13711857. The replay will be available until November 20, 2020.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this press release that do not relate to matters of historical fact should be considered forward-looking statements, including statements regarding our future opportunities; our goals, strategies, priorities and initiatives; sales trends and momentum; our anticipated financial performance; the availability of our new product line with Marie Kondo and our plans in response to the outbreak of COVID-19.

These forward-looking statements are based on management's current expectations. These statements are neither promises nor guarantees, but 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, including, but not limited to, the following: the outbreak of COVID-19 and the associated impact on our business, results of operations and financial condition; our ability to continue to lease space on favorable terms; costs and risks relating to new store openings; quarterly and seasonal fluctuations in our operating results; cost increases that are beyond our control; our inability to protect our brand; our failure or inability to protect our intellectual property rights; overall decline in the health of the economy, consumer spending, and the housing market; our inability to source and market new products to meet consumer preferences; failure to successfully anticipate consumer preferences and demand; competition from other stores and internet-based competition; vendors may sell similar or identical products to our competitors; our and our vendors' vulnerability to natural disasters and other unexpected events; disruptions at our Elfa manufacturing facilities; deterioration or change in vendor relationships or events that adversely affect our vendors or their ability to obtain financing for their operations, including COVID-19; product recalls and/or product liability, as well as changes in product safety and other consumer protection laws; risks relating to operating two distribution centers; our dependence on foreign imports for our merchandise; our reliance upon independent third party transportation providers; our inability to effectively manage our online sales; effects of a security breach or cyber-attack of our website or information technology systems, including relating to our use of third-party web service providers; damage to, or interruptions in, our information systems as a result of external factors, working from home arrangements, staffing shortages and difficulties in updating our existing software or developing or implementing new software; our indebtedness may restrict our current and future operations, and we may not be able to refinance our debt on favorable terms, or at all; fluctuations in currency exchange rates; our inability to maintain sufficient levels of cash flow to meet growth expectations; our fixed lease obligations; 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; changes to global markets and inability to predict future interest expenses; our reliance on key executive management; employee furloughs and uncertainty about their ability to return to work; our inability to find, train and retain key personnel; labor relations difficulties; increases in health care costs and labor costs; violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery and anti-kickback laws; impairment charges and effects of changes in estimates or projections used to assess the fair value of our assets; effects of tax reform and other tax fluctuations; and 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; our performance meeting guidance provided to the public; 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.

These and other important factors discussed under the caption 'Risk Factors' in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, (the 'SEC') on June 17, 2020 and our other reports filed with the SEC could cause actual results to differ materially from those indicated by the forward-looking statements made in this press release. Any such forward-looking statements represent management's estimates as of the date of this press release. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause our views to change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this press release.

About The Container Store

The Container Store Group, Inc. (NYSE: TCS) is the nation's leading retailer of storage and organization products and solutions - a concept they originated in 1978. Today, with locations nationwide, the retailer offers more than 11,000 products designed to help customers accomplish projects, maximize their space and make the most of their home. The Container Store also offers a full suite of custom closets designed to accommodate all sizes, styles and budgets.

Visit www.containerstore.com for more information about store locations, the product collection and services offered. Visit www.containerstore.com/blog for inspiration, tips and real solutions to everyday organization challenges, and www.whatwestandfor.com to learn more about the company's unique culture.

See Reconciliation of GAAP to Non-GAAP Financial Measures table.

The Container Store Group, Inc.

Consolidated statements of operations

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