Retail has had its highs and lows lately, but Container Store Group (NYSE: TCS) has faced more than its fair share of challenges. The company best known for its tenets of conscious capitalism has had to deal with structural issues as well as a tough overall environment, and that's kept its stock off the top performers' list for quite a while. Yet some of that stigma seemed to lift a few months ago, when Container Store finally had a good set of results that seemed to point toward a brighter future.
Coming into Tuesday's fiscal second-quarter financial report, Container Store investors had hoped that the retailer would be able to build on positive momentum from its earnings report in early August. Instead, the company suffered from weak earnings, and many worry that Container Store won't be able to mount a permanent recovery.
Image source: Container Store.
How Container Store got messed up
Container Store's fiscal second-quarter results left something to be desired. Revenue rose less than 3% to $224.5 million, which was a bit less than those following the stock had expected but far slower than what the company enjoyed in the previous quarter. Although Container Store reversed a year-earlier loss on a GAAP basis, adjusted net income was down, and that produced adjusted earnings of $0.10 per share. That was worse than the $0.14 per share consensus estimate among investors.
The hit that Container Store took fundamentally stood in stark contrast to its excellent quarter a few months ago. Comparable store sales rose just 1.3%, and even with new stores adding some more revenue, the retail segment was higher by just 3.3%. Meanwhile, the company's sales of Elfa units dropped 3% compared to year-earlier levels, mostly because of the strong U.S. dollar compared to the currencies of the Scandinavian markets where those goods are sold. Currency impacts cost Container Store nine full percentage points of growth in the Elfa unit, showing just how big a difference the dollar made.
Container Store did everything it could to try to offset the negative impact of sluggish sales growth. Gross margin improved by about a third of a percentage point to 58.2%, with lower costs of goods sold helping to mitigate the higher promotional costs that Container Store incurred. Overhead expense was actually down almost 1% from year-earlier levels thanks to Container Store's optimization plan. The fact that store opening activity was less extensive than in previous quarters also led to cost savings, even though money spent on interest expense jumped by more than a quarter.
CEO Melissa Reiff tried to keep things in perspective. "We continued to make progress against our key strategic initiatives in the second quarter," Reiff said, "and also completed a debt refinancing that extends the maturity of our credit facility while generating approximately $0.07 per share in annualized interest savings." The CEO also noted that the custom closets area remains its top priority, even though some of Container Store's attempts to connect with customers didn't work as well as it had hoped.
Can Container Store bounce back?
Container Store is also trying to stay optimistic. Reiff pointed to effective digital marketing campaign activity and strong growth in omni-channel sales efforts as key contributors to the retailer's performance, and she's hopeful that after a while, Container Store will return to more consistent outperformance.
Container Store reiterated its full-year outlook with some minor changes. That included sales projections for $885 million to $895 million that were cut by $5 million to reflect currency impacts. Comps should rise 1.5% to 2.5%, and adjusted earnings of $0.41 to $0.51 per share actually rose by $0.03 thanks to interest savings on its credit refinancing.
Even with that guidance, though, Container Store investors weren't entirely happy with the fact that the company failed to live up to their expectations on the bottom line. The stock plunged 18% in after-hours trading on Tuesday following the announcement, and until Container Store can convince its shareholders that it can mount a true turnaround, many will remain skeptical about its long-term prospects.
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