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Container Store: Will 'Employees First' Translate to Profits?

The Exchange
Signage is seen at a Container Store in New York November 1, 2013. Shares of Container Store Group Inc doubled in their U.S. market debut on Friday as investors encouraged by a recent run of impressive "first-day pops" piled into the stock. The company is the seventh this year whose shares have doubled on the first day of trading, according to Jay Ritter, a finance professor at the University of Florida. REUTERS/Andrew Kelly (UNITED STATES - Tags: BUSINESS)

After 35 years in business, The Container Store (TCS) has brought its be-a-better-corporate-citizen ethos to Wall Street.

The Coppell, Texas-based company, which sells all manner of storage and organization goods, went public amid considerable fanfare less than a month ago, spreading its message of treating employees right and doing business the proper way. While small in reach, with 63 stores in 22 states and Washington, D.C., it turned in nearly $707 million in sales for the most recent fiscal year, a number that rose from $633.6 million the year before and $568.8 million the one prior to that.

It's done this by expanding on one basic idea – give people a mind-boggling array of ways to partition their stuff. Go to one of the stores, generally found in the nice part of town, and you'll see that if you need something to hold something, there's a reasonably good chance Container Store has it. The hooks category alone lists 362 options, and toy storage has 264 separate items. There are 210 garage-related products, and 67 listings for shoe storage and care.

Whether it's wine racks for the kitchen, Elfa shelving, flat boxes for the bedroom or shower caddies for the bathroom, they have it. You can pay a lot -- the priciest closet set-up is $3,893 if you put it in yourself. Or you can pay a little -- of the 5,713 items Container Store's website prices individually, nearly 84% are $25 or less. You could spend over $200 for a three-tiered cart, or $3.99 for a razor case.

You get the picture. But it's not as much what Container Store does as how it says it does it that contributes to its success. It's been praised by influential types like Ellen DeGeneres and Oprah Winfrey for its clever designs. It donates money to local charities when it opens a new store. And more than anything, it believes in paying employees what amounts to a premium salary for retail. Whereas Walmart (WMT) or RadioShack (RSH) might pay less than $9 an hour, many Container Store sales staff report to Glassdoor.com making more than $12.50 an hour. That's well above the $7.25 federal minimum wage. Store managers say they average $63,000 a year.

Politics at the door

It's not a stretch to say that Container Store may either appeal to you or put you off depending on your worldview. If you take comfort in chains embracing progressive ideals about fair pay and protecting the Earth, this could be your place. If you drive a hybrid, believe Starbucks (SBUX) gets it with coffee sourcing, or you shop at Whole Foods (WFM) – whose co-founder John Mackey espouses the Conscious Capitalism tenets shared by Container Store CEO Kip Tindell -- you may want to buy your boxes here.

Should you find such talk preachy, you view spending anything on a mesh washing bag to be excessive, you don't have a problem with McDonald's (MCD), or you get around in a Dodge Ram, you might prefer parting with your money elsewhere.

The Container Store, in short, wastes no chance to discuss how it operates. Regulatory documents filed with the Securities and Exchange Commission before its initial public offering lay out the company's philosophy, which begins and ends with an "employee-first" mantra. "Taking care of our employees is The Container Store's top priority, so we continually invest in their recruitment, training and overall job satisfaction," it says.

And it doesn't hire just any person who wants a job, saying it takes fewer than 4% of applicants each year. Training is long, and complete benefits are typical. With pay being what it is, full-time worker turnover is only around 10%, and year after year, it lands Container Store on Fortune's list of the best places to work. (That said, not every review is sterling, with some employees saying anonymously on Glassdoor that the company is far from perfect.)

The company insists its way works, appealing both to a broad demographic along with its core customers, whom it describes as "predominantly female, affluent, highly educated and busy. " Same-store sales, an important statistic for retailers, have been positive for 13 straight quarters, suggesting there's at least some truth to it.

What isn't ideal

Not everything's entirely rosy financially, however. Container Store isn't profitable, owing partly to accounting adjustments, though its bottom line has been improving and analysts expect a profit soon.

Gross margins are impressive, but some costs are quite subtantial, no doubt reflecting payroll levels to a degree. Selling, general and administrative expenses are more than 45% of revenue, well above industry norms. For nine of the 10 largest American retailers, excluding Amazon (AMZN), the average is around 19%. At Bed Bath & Beyond (BBBY), a semi-competitor to Container Store, the percentage is under 26%. The company does give a nod to this, noting that its SG&A outlays "may not be comparable to the components of similar measures of other retailers," so investors and analysts will sort that out over time.

Its current debt load, more than $390 million, is arguably on the high side. Still, credit-rating agency Moody's believes it has adequate cash and borrowing ability for the time being.

Stock analysts started rolling out their opinions on the company this week. They're not universally upbeat considering where Container Store is trading relative to its IPO price (it's gained some 15% from its first trade at $35), but they are mostly supportive of its prospects.

Container Store believes it can get to 300 or more stores in the U.S., although the company hasn't assigned a timeline to that goal. To do so, it will need to start setting up shops at a faster clip than it historically has. Since its beginning in 1978, it's averaged opening under two stores a year. At that rate, it would take 132 years to get to the target, so obviously the buildout will be somewhat aggressive.

More than anything, it may just need to convince American consumers that business with a conscience is worth a few extra dollars out of their pockets.