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Here's What Has Container Store Investors Excited

Dan Caplinger, The Motley Fool

Many investors believe conscious capitalism is the wave of the future, and Container Store Group (NYSE: TCS) has made it a key part of its corporate mission to include tenets of the investing philosophy in its business plan. Yet Container Store has also had to deal with tough industry conditions in recent years, calling into question whether conscious capitalism is consistent with a successful, profitable business.

Coming into Tuesday's fiscal first-quarter financial report, Container Store investors were nervous about whether it could sustain some positive momentum from its results three months ago. As it turned out, the organizational goods retailer did far better than that, sending its shares soaring on new hopes that the business could start thriving again sooner rather than later.

Container Store gets organized

Container Store's fiscal first-quarter results were stunning. Revenue was higher by 7% to $195.8 million, which accelerated from the pace in the fiscal fourth quarter three months earlier. Container Store still wasn't profitable, but its adjusted net loss narrowed to $4 million, and the resulting adjusted $0.08 per share in red ink was a bit better than most of those following the stock were expecting to see.

Fundamental performance from Container Store was promising. Comparable-store sales were up 4.7%, up substantially from previous quarters. The company said that almost two percentage points of that increase came from orders for custom-closet systems that customers placed last quarter, but that were delivered and installed within the last three months. Those impacts should carry forward every quarter, helping to lift comps over the remainder of the new fiscal year as well.

Closet showing shoes, blouses, and jackets separately organized in a unit.

Image source: Container Store.

The company's main retail business did well, seeing sales climb 8%. Container Store cited both comparable-sales gains and new stores for the overall top-line rise. Unfortunately, Container Store's Elfa unit didn't fare as well, falling 2% compared to last year's fiscal first quarter, as sales in Scandinavia were weak despite what would have been positive contributions from a weaker dollar compared to the euro and other European currencies.

Helping push Container Store forward was its cost-management plan, which saw its impact felt across the business. Gross margin jumped two percentage points to 58.6%, with lower costs of goods allowing the company to keep more of its sales in the form of profits. A sales mix that featured higher-margin products also helped contribute to the positive performance.

CEO Melissa Reiff was happy with the start to the new fiscal year. "We are very pleased that our strong fourth quarter momentum carried through to the first quarter of fiscal 2018," Reiff said, "with improving trends in our Custom Closets business as well as ongoing positive comparable store sales contribution from our other product categories." The CEO also pointed to the healthy effects of "sales revitalization and optimization initiatives" on overall financial performance.

What's next for Container Store?

Even more encouraging were Container Store's comments about the future. In Reiff's words, "We are encouraged by our progress and excited about the opportunities that lie ahead." Efforts such as redesigning its Dallas flagship store, rolling out new market campaigns, and focusing on merchandising and e-commerce channels have already paid off, and there's more room for further improvement ahead.

As a result, Container Store increased its guidance for fiscal 2018. The retailer now thinks revenue will be between $890 million and $900 million, up $10 million from its previous range. Comps should rise 1.5% to 2.5%, which is much better than the 0% to 1% gains previously expected, and adjusted earnings of $0.38 to $0.48 per share reflect a $0.03 per-share boost.

Container Store investors appear convinced that the latest results represent a real turnaround, and the stock soared 36% at midday on Wednesday following the Tuesday evening announcement. Now that the projects Reiff and her team are trying to roll out have started showing signs of success, shareholders hope that more gains will come from Container Store's organization efforts in the months and years ahead.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of The Container Store Group. The Motley Fool has a disclosure policy.