Container Store (The)

Greetings, and welcome to the Container Store fourth quarter 2020 earnings call. At this time, all participants earn a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Caitlin Churchill, Investor Relations.

Good afternoon, everyone, and thanks for joining us today for the Container Storage Fourth Quarter and Fiscal Year 2020 Earnings Results Conference Call. Speaking today are Satish Malhotra, Chief Executive Officer, and Jeff Miller, Chief Financial Officer. After Satish and Jeff have made their formal remarks, we will open the call to questions. Before we begin, I need to remind you that certain comments made during this call regarding our plans, strategies, expectations regarding liquidity and goals Our anticipated financial performance and our plans in response to COVID-19 and the potential impact of COVID-19 on our business may constitute forward-looking statements and are made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those important factors are referred to in the Container Store's press release issued today and in our annual report on Form 10-K filed with the SEC on June 17, 2020. The forward-looking statements made today are as of the date of this call, and the Container Store does not undertake any obligation to update their forward-looking statements. Finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call. A reconciliation schedule of the non-GAAP financial measures to the most directly comparable GAAP measures is also available in the Container Store's press release issued today. A copy of today's press release may be obtained by visiting the investor relations page of the website at www.containerstore.com. I will now turn the call over to Satish.

Thank you, Caitlin. Welcome, everyone, to our Q4 and full-year earnings call. Since joining the company at the start of February, I've now met with teams across our organization. I've worked closely with them to understand our core strengths and where the opportunities lie. These past few months have reconfirmed my belief that the Container Store has a strong foundation. This company has built a unique position as the authority in providing our loyal customers with creative, multifunctional, customizable storage and organization solutions. Our passionate teams are energized by the recent momentum and are eager to make the container store the best version of itself. Numerous studies illustrate the benefits of leading an organized life, including reduced stress and improved emotional well-being. Our unique competitive advantage comprised of extensive product assortment, customizable solutions, and expert team members help our customers realize these meaningful benefits. Additionally, we believe the addressable market is more than $20 billion when including the largest storage and organization market to the custom closets opportunity. While the container store holds a piece of that market today, we are keen to gain more market share. As a reminder, we offer a complete end-to-end experience to our customers, and we do that through our custom closets, in-home organization services, and our extensive general merchandise categories. This is all supported by our omni-channel presence. To dominate in this larger addressable market, though, we will focus on deepening our relationship with our customers, expanding our reach, and strengthening our capabilities. Before expanding on these areas of focus, let me first review briefly our phenomenal fourth quarter performance, which Jeff will discuss in more detail. The incredible momentum we saw in the third quarter continued into the fourth quarter. We delivered results ahead of our previously provided outlook. For the fourth quarter, consolidated net sales were $314.7 million, up 30.4%, with an adjusted EPS of 71 cents compared to 26 cents last year. Our outstanding performance for the second half of fiscal 2020, combined with our disciplined focus on liquidity, allowed us to end the fiscal year with a strong balance sheet. We generated free cash flow of $121.1 million, of which we utilized approximately $78 million to pay down our senior secured term loan. We also saw continued growth of our POP loyalty program, We recently surpassed 10 million members and celebrated this milestone by asking our lower members to describe why they love the Container Store. And their responses were heartening. For example, one member said, I love the Container Store because it helps me reduce my stress by providing fantastic products to organize my home and life. Another member said, I love the sense of peace and contentment that comes with an organized space. Thank you, Container Store. We received many responses that echoed these powerful customer sentiments. We have not only successfully maneuvered an unprecedented 2020, but we have also positioned ourselves to thrive by launching innovative products and marketing partnerships acquiring new customers, and strengthening our financial position through prudent expense management and debt reduction. With this strong foundation, we are moving forward to make the container store the best version of itself. The next chapter of the container store will be an evolution of who we are today. We aim to deliver a more purpose-led mission to enrich and transform the lives of our customers through the power of organization. As I mentioned, our focus going forward will be in three key areas, deepening our relationship with our customers, expanding our reach, and strengthening our capabilities. Let's start with deepening our relationship with our customers. A recent survey we conducted informed us that our customers chose to make the most of their homes during the pandemic. Organizing spaces within their homes helped provide them with a sense of calm and control in an otherwise chaotic environment. Customers saw the Container Store as the authority in assisting them in decluttering and de-stressing. They valued both our extensive multifunctional and inspirational product assortment and our friendly, engaging, and knowledgeable employees. We believe we can successfully deepen our relationship with our customers by concentrating our efforts on our product assortment, in-store shopping experience, and branding. Regarding our product assortment, our customers crave discovery, inspiration, and solutions that simplify their lives and maximize their spaces within their homes. And we aim to deliver just that. We will do this through product newness, collaboration, the expansion of our superior private label assortment, and the amplification of our sustainably sourced products. I'm pleased to share that we have rapidly grown our sustainably sourced products in just the past few months to approximately 10% of our assortment. This achievement was fueled by the launch of our exclusive partnership with Marie Kondo, featuring more than 100 sustainable products. And later this summer, we will be launching a session with the Home Edit. Our commitment to sustainability goes beyond brand collaborations, though, as we look to expand our assortment of natural fibers and explore new options for renewably sourced products and recyclable products. This important initiative will be further supported by our newly hired Vice President of Merchandising. Turning to our in-shopping experience, our customers also yearn for a friendly and engaging shopping experience with trusted and knowledgeable employees. We know that customers who engage with an in-store employee convert at a significantly higher rate and spend more than those that don't. To foster a deeper level of engagement, we will be enhancing our air of excitement in stores by adding hosts, zoning key areas, and creating memorable experiences with in-store play zones and demonstrations. Customers will also see more curated visuals that inspire and teach. And our marketing campaigns will focus more on product discovery. Our expert organizers will be available to provide the highest level of service, and our stores will become the ultimate destination for customers looking for new ways of living through the power of organization. Finally, we know branding that evokes emotion is far more impactful than functional messaging. We will refine our vision and purpose to galvanize this emotional connection. and champion the enriching benefits of living an organized life. This will include utilizing more before and after and real-life images and user-generated testimonials and stories. We'll also customize customer interactions and embed emotional and lifestyle elements across our customer's journey, all of which will be supported by an enhanced loyalty program that rewards a deeper level of engagement. Let me now turn to our second priority, expanding our reach, starting with custom closets and home solutions. We own a fraction of the market, and we are eager to amplify our share of that market by harnessing our end-to-end value proposition. For example, we will now intentionally peer our in-home organizers with our custom closet customers. The in-home organizer will not only help customers organize their newly installed space, but will also help them find the right products that will complement that new space. Our objective here is to provide our custom closet customers with an orchestrated and frictionless end-to-end experience that they will come to value. We will also be introducing the endless possibilities of alpha to our everyday general merchandise customers through our curated alpha starter sets and grab-and-go solutions. We believe that once our general merchandise customers experience the power of alpha, they will likely transition into purchasing a custom-designed space and generate a lifetime value that is many, many multiples above their acquisition cost. Additionally, we aim to enhance our custom closet product lines. We have historically done very well in driving market share for spaces under $2,000, but we see significant opportunity to improve our market share in spaces above $2,000. Our current Avera promotion has demonstrated our ability to successfully sell spaces that average over $6,000. And lastly, we're also keen to grow our B2B and trade program. We have just brought the program in-house and have organized it under one central leader, our new vice president and general manager of Custom Closets. And in doing so, we expect the program to flourish. Now turning to our plan for e-commerce. For fiscal 2020, our website-generated sales, inclusive of curbside pickup, grew 121%. Digital commerce has expanded across all social platforms. Mobile now accounts for two-thirds of online traffic, and we plan to accelerate our growth by significantly improving the everyday online experience. This includes executing our three new strategic partnerships, With Narvar, we will improve fulfillment transparency for our customers and make returns easier for them. With Instacart, we will enhance our delivery capabilities with same-day delivery. And with Afterpay, we will offer customers the flexibility of a buy now, pay later option. We are excited about the future growth potential of our e-commerce business. Regarding our store network and collaboration, we know that our customers value our physical stores and the connections that they make with our trusted and knowledgeable employees within them. We also know there's significant white space opportunity for the container store, which we will address over time. Our immediate focus is on maximizing the productivity of our existing store fleet. which we believe is a meaningful opportunity. And we would realize this opportunity by deepening our relationship with our customers through our product assortment, in-store shopping experience, and branding. We are also determining our future store growth plans, though. This includes the ideal go-forward store size and configuration. We know that smaller store formats work well through the test that we have conducted today, and we have reason to believe we can go even smaller. We plan to test a smaller and more productive store during fiscal year 2022. In addition, we also believe we can expand our reach by exploring a shop within shop concept with quality retailers who complement our business. Our newly hired Vice President of Real Estate will help further formulate our expansion plans. As it relates to collaborations, the nurturing of our relationships with The Home Edit and Marie Kondo will continue to prosper with the release of their highly anticipated shows on Netflix. We are also cultivating new relationships with influencers that have category credibility and can expand our visual presence. For example, our kitchen category will soon be supported by newly formed culinary partnerships. These mutually beneficial relationships allow us to reach new and existing customers in creative ways. Our third and final priority is to strengthen our capabilities. We plan to do this in four ways. One, through continuous improvement. which entails capturing operational efficiencies through process re-engineering and leveraging technology in a way that allows us to become more efficient. Operational efficiencies will be reinvested back into the business to support priorities. Two, by becoming an employer of choice and fostering an environment that is diverse, inclusive, and equitable, The recent hiring of our new head of diversity, equity, and inclusion will support this critical initiative. Three, by expanding our focus on environmental, social, and governance initiatives. I'm proud to announce that as of today, the power used by all of our stores, distribution centers, and corporate office will now be offset by our investment in 100% renewable energy. Additionally, we will perform a materiality assessment in fiscal 2021 and have just hired a new head of ESG to support this effort. And finally, we will strengthen our capabilities by creating a more streamlined organization that is aligned to our strategic priorities. And as previously mentioned, we have made several critical hires to complement our current leadership team. We are thrilled at the Container Store's ability to attract great talent, including the recent addition of our new Chief Information Officer, Guchi Saha. In summary, these strategic priorities that I've just laid out are expected to drive market share gains and effectively double our business over time, and all the while unleashing the enriching benefits of organizations to our customers. In closing, I could not be prouder of our teams for the accomplishments that they achieved before my arrival. They navigated a challenging and dynamic environment throughout fiscal 2020 incredibly well, and their hunger to win has fueled this powerful brand. Additionally, these results could not have been made possible without my predecessors steady leadership, and resolve will survive. As we look ahead, we are eager to make the container store the best version of itself. I'll now turn the call over to Jeff to review our financial results, outlook, and more detail.