Container Store (The)

Greetings, and welcome to the Container Store's first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A 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. I would now like to turn the conference over to your host, Caitlin Churchill of Investor Relations.

Good afternoon, everyone. And thanks for joining us today for the Container Store's first quarter fiscal year 2021 earnings results conference call. Speaking today are Satish Mihultra, 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 Save Carver 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 3, 2021. 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 the 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 and investor deck 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. Satish?

Thank you, Caitlin, and thank you all for joining our call today. I'll first discuss the highlights of our fiscal Q1 performance, followed by details on our growth initiatives. Jeff will then review our financial results in more depth and discuss our outlook. We're just thrilled with our first quarter performance where we delivered profitability for the first time in over a decade with record first quarter sales. This achievement is really worth repeating. We delivered profitability for the very first time in over a decade during our first fiscal quarter, which has traditionally been a loss-making quarter due to lower sales and the inability to leverage on our fixed expenses. For the quarter, we achieved consolidated net sales of $245.3 million, growing nearly 62% compared to last year, and 17 percent over first quarter 2019. Our record sales, combined with strong gross margins and disciplined expense management, drove a 10.8 percent operating profit margin and adjusted EPS of 36 cents, an improvement of 68 cents compared to last year and 44 cents over first quarter 2019. We also saw continued growth of our POP loyalty program, with total members enrolled at the end of Q1 of almost 10.3 million members, signifying a total increase of approximately 15% on a year-over-year basis. As a reminder, about 75% of our sales are linked to our POP program. By better mining this rich data, we can offer our customers more personalized, and targeted interactions, which we believe will increase their frequency and spend with us. It is important to note we achieved record-breaking results in Q1, all while pressure testing our strategic growth initiatives. For example, we materially changed our promotional cadence and our approach to our custom closet and general merchandise categories in Q1. As previously mentioned on our last call, we see considerable growth opportunities in selling premium closet spaces over $2,000, where we have minimal shift. To that end, we executed our first standalone Avera event, which attracted a healthy percentage of new customers to the Container Store. We sold a variety of custom spaces that averaged $6,000 per space. ranging from traditional closet spaces to entertainment spaces, offices, mudrooms, and even basement spaces. Moreover, the Avera event also produced a halo effect in growing full-price sales in our other closet lines, Alpha Classic, Alpha Decor, and Laran. I'm pleased to say the success of the Avera event validated the growth we see in premium closet spaces and our ability to capture it. Additionally, as mentioned before, a small percentage of our general merchandise customers are also custom closet customers, and we see growth opportunities in converting these customers to custom closets. Our recent Alpha for the Win event demonstrated our ability to drive growth within our existing customer base. This event rewarded customers for purchasing additional alpha starter sets and spaces for a better overall discount. We are pleased to share one-third of the spaces sold during the event were to first-time Custom Closet customers, of which more than two-thirds came from existing general merchandise customers. Additionally, over 60% of the sales during the event came from customers purchasing three or more alpha starter sets and spaces. And we generated $6 million in alpha component sales, which were not even part of the event. Lastly, we are delighted with the customer response we received to our front of store transformation. Our front of store presentation focused exclusively on curated products at full price, supported with compelling before and after customer testimonial graphics. The front of store presentation provided customers with an opportunity to learn, discover, and engage with key merchandise offerings from our kitchen and closet categories. The bold changes we made in our custom closet promotions and front of store transformation served to drive both sales as well as gross margin expansion during the first quarter. Another area of change during Q1 was our in-store and online customer experience. We positively enhanced our in-store customer experience through the addition of greeters and selling specialists. As a reminder, this was funded by reducing our non-selling payroll hours. Through our partnership with Medallia, we were able to learn that customers who were greeted or assisted in-store experienced a significantly higher than average ticket and net promoter score as compared to those that were not. To date, our in-store net promoter score as tracked by Medallia is out of 77, which again is higher than many other known retailers. Based on these positive results, we will now be zoning specialists in key areas of the store to help assist and engage with our customers. From an online perspective, during Q1, we made some modest improvements to the site navigation with the goal of making it easier for customers to find what they were looking for. We also made significant improvements from a shipping perspective, with 96% of all direct-to-customer orders being shipped within 48 hours of order placement. The changes implemented in Q1, combined with the dedicated work of our stores, distribution centers, and support teams, fueled our outstanding Q1 performance. As we look forward, we are optimistic that our actions will continue to support our goal of driving continued growth. A quick update now on our previously communicated strategic initiative. We are making good progress on our first initiative, deepening our relationship with our customers by winning product and invoking emotion through branding. In July, we launched our newest line of sustainable products, the Home Edit Wooden Collection. This incredibly lightweight collection is made of Paulina wood, one of the fastest growing hardwood trees in the world. The line celebrates the Home Edit's passion for multifunctional solutions to maximize spaces throughout the home by storing everything from toys, pantry items, and kitchen utensils. We are equally thrilled about Marie Kondo's upcoming Netflix series, Sparking Joy, available for subscribers on August 31st. The show will include transformations of spaces beyond the home. To celebrate the show, customers can expect to see our exclusive sustainable KonMari product line merchandise at the front of our stores in late August. From closet to kitchen to office, we will help customers find the right KonMari solution for their needs. In the spirit of listening to our customers, we are also using the strength of our private label assortment, known for its outstanding durability, quality, and value, to launch new exclusive products that our customers are craving. For example, in late Q1, we launched the highly anticipated extra-large drop-front shoebox. This shoe box holds up to a size 16 shoe, enables you to see the shoes or shoe box stored inside, and is proudly made in the USA. This product was requested by our Sneakerhead fan base and also delivered on their app for a stronger door hinge. Our exclusive drop front products will be prominently displayed in our stores beginning in August. Another example of our private label strength is the introduction of the container store trash cans and chrome under cabinet rollouts. Both private label products are already delighting customers and positively impacting our margins. While over 50% of our sales come from private label products, there is still untapped growth opportunity to deliver unique solutions to meet our customers' needs. When it comes to branding, we just completed work with our agency partner, Preacher, to move our brand purpose from a functional to an emotional state. I'm delighted to share our company's purpose is to help transform the lives of our customers through the power of organization. With our new brand purpose, we intend to bring awareness to the enriching benefits of an organized life. We have seen firsthand the transformation of our customers' lives where, for example, de-cartering can truly lead to de-stressing. We have challenged ourselves to enlighten new customers to the power of organization while still delivering for those customers who are already aware of the life-transforming benefits of organization. As it relates to our second strategic priority, expanding outreach, we are still in the early phases of this strategy. But we are seeing momentum in business-to-business sales after bringing the program in-house and organizing it under one central leader. We have secured new contracts with private luxury residences in high-rises, senior living communities, and mixed-use developments. Additionally, we are re-envisioning our trade program, which kicked off with a sponsorship of the 2021 American Society of Interior Designers Conference. we are pleased with the attention we have put on our B2B and trade programs, which are beginning to show positive growth signs. Also this quarter, we opened a new, smaller format store in Annapolis, Maryland, and early results are exceeding our expectations. The customer response has been outstanding from opening day. Recently, we announced plans to open an even smaller store at 12,000 square feet in Colorado Springs, Colorado in 2022. We're excited about the demand of our stores in different markets. We not only see great growth opportunities in new markets, but also expansion opportunities in existing markets with a smaller footprint store using a hub and spoke model. While we are still early in the process of determining and refining our store growth plans, including a possible store within store concept, we remain focused on optimizing the productivity of our existing store base. Finally, I will conclude with an update on priority number three, strengthening our capabilities. With the recent hiring of our CIO, we have put in place a robust technical roadmap to enable and support our growth plans. For example, we are actively working on technology that would allow us to ship from store, further improving upon our last efforts, and taking advantage of managing our inventory on an enterprise-wide level. We're also working on a mobile point-of-sale solution. This will allow us to dramatically improve checkout speed. We'll make our online assortment available in store, and we'll support our even smaller store format concept. Additionally, we are diligently working on enhancing our customer e-commerce experience through a faster site, engaging content, more relevant site searches and recommendations, and additional payment options. These enhancements are on top of the improvements in fulfillment transparency through our new partnership with Narva, which was launched in July, on the heels of launching Afterpay Online. Our partnership with Afterpay is already attracting new customers and delivering a higher than average ticket both in-store and online. I'll now turn the call over to Jeff to discuss our financial results in more detail.