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Risk-Reward With Container Store

- By Jonathan Poland

It's been a long drop from the mid-$40s for The Container Store Group Inc. (TCS). With the price now below $5, the question becomes: Is the reward worth the risk? The answer is still no, despite the company's efforts in 2018 to regain positive footing.

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For one, the company continues to produce positive advances on both the top and bottom line. Its operating cash flow over the past 12 months is just shy of $50 million. It has a book value of $5.01, which is 12% higher than its current price. And, the company has been profitable since 2015 -- no small feat when you're selling storage and organization products.

Customers appear to still be buying products from The Container Store. In the latest earnings report, the company posted a 2.8% year-over-year increase in sales to $224.5 million, bringing its tally for the past 12 months up to $876 million.That didn't translate into profit gains, however, as the retailer missed earnings by 50%, posting earnings of 7 cents per share.

The issue, as with so many companies in today's market, is the balance sheet. The Container Store brand may be able to withstand a downturn in the economy better than others, but financially speaking, it's worth about zero. In 2013, private equity firm Leonard Green helped take the company public and, in doing so, loaded it with debt. Now it has $282 million in long-term debt, $227 million in intangible assets and $203 million in goodwill, which should be stripped off any analysis of its balance sheet.

While store comps may continue to rise, the company has a long way to go before it justifies even its current value. There are also fewer Container Store openings, and the company should look for more ways to drive sales online as it does with its Elfa solutions service. It has been experimenting with smaller stores in the 20,000-square-foot range, but redesigning isn't going to bring in the foot traffic. In fact, the company shouldn't need that much foot traffic at all. Anyone looking to organize can get ideas across the company's social media accounts and then order the exact package online and either do it themselves or hire the Elfa experts. Instead of looking like a traditional retail store as it does now, it should get lean and focus almost exclusively on the customer via digital marketing and fast in-store turnaround times.

People will always seek storage and organization solutions, but The Container Store doesn't occupy that space in its customers minds -- it's just another retailer. When a company is operating in a highly competitive industry such as retail, which is experiencing rapid change, it's hard to win when the debt is greater than the market cap and you have a negative tangible book value.

There is likely more pain to come for current shareholders as the $1.30 per share it was looking to earn in 2019 may be far less. While I don't think the comapny will go out of business next year, investors should steer clear of the stock.

Disclosure: I am not long or short The Container Store.

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This article first appeared on GuruFocus.