Container Store (The)

Greetings. Welcome to the Container Store Second 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. Please note this conference is being recorded. I will now turn the conference over to your host, Caitlin Churchill. Thank you. You may begin.

Good afternoon, everyone, and thanks for joining us today for the Container Storage Second Quarter Fiscal Year 2021 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 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 their forward-looking statements. Finally, 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 outstanding fiscal Q2 performance, followed by an update on our growth initiatives. Jeff will then review our financial results in more depth and discuss our outlook. Our outstanding financial performance continued into Q2 as we delivered our highest second quarter sales results and our most profitable second quarter on record. As a reminder, this is our fourth consecutive quarter of record growth and profitability, demonstrating our ability to drive the business forward while maintaining strong cost discipline in a complex economic environment. For the quarter, we drove consolidated net sales of $276 million, an increase of 11% compared to last year. and an increase of over 16% compared to the second quarter of fiscal 2019. Our robust sales performance combined with our better than expected gross margin results delivered exceptional earnings per share of $0.54 compared to an adjusted EPS of $0.43 last year and $0.08 in the second quarter of fiscal 2019. Our excellent financial performance was fueled by strong consumer demand and by continued progress against our strategic pillars, including driving more profitable sales as we purposefully reduce the depth, breadth, and duration of our promotional cadence. As mentioned in our prior earnings call, we have focused our efforts this fiscal year on maximizing the productivity of our existing store base. And our Q2 results reflect that hard work. By curating and resetting our merchandising assortment, embedding more storytelling into store visuals, implementing more engaging promotional campaigns, and by adding more specialists to the selling floor, we believe we can deliver a better customer experience with much greater profitability. Improving the fundamentals of our existing store base provides a solid foundation for our future growth plan. Now, while we are still in the early innings of these improvements, we are extremely proud of our results to date. In Q2, we saw continued strength across our assortment, led by the impressive growth of our custom closet business at 22% compared to last year and to fiscal 2019. Our custom closet business offers our customers superior quality, affordability, and customization, and is a competitive advantage when paired with our general merchandise, completion products, and in-home services. As previously mentioned, we see a significant opportunity to drive market share for spaces over $2,000, as demonstrated by the continued success of our premium Avera closet line, with sales almost doubling compared to Q2 of last year. Even more impressive was how our most affordable closet line, Alpha, performed during the September Fall in Love with Alpha campaign, which ended mid-October. By incentivizing customers to purchase more alpha products to receive a higher discount, we were able to drive a much higher basket, with two-thirds of campaign sales delivering a basket size of approximately $3,000. Whether through more premium closet offerings or through strategically orchestrated promotional events, we are delighted at our ability to deliver higher baskets and improve sales productivity in our custom closet business. When it comes to our general merchandise business, we delivered 3% growth compared to last year, which, as a reminder, greatly benefited from the successful launch of the Home Edit Netflix series. Compared to fiscal 2019, our general merchandise business grew a healthy 13%. As part of our effort to drive more profitable sales growth in our general merchandise business, we made some bold changes to our promotional cadence during Q2, such as eliminating our traditional mini office sale and significantly narrowing and shortening our customer favorites campaign. As a result of these changes, we not only saw a higher average basket, we also saw a better overall margin for the campaign as compared to last year. In addition, we surprised our customers with significant newness across our general merchandise categories and presented newly re-merchandised discovery areas, which began with Garage at the end of Q1. During the second quarter, we created a captivating kitchen gadget wall, reduced our travel and gift wrap departments, while bolstering our closet department. We also introduced an effortless way to experience our Alpha prepack and Grandma Go assortment, The new Alpha Made Easy discovery area not only centralized all of our prepacks, but also allowed us to add new kits and graphics to demonstrate the versatility of our prepacks. These new discovery areas look fantastic, and the customer response has been extremely positive. As mentioned on our last earnings call, Marie Kondo's three-show Netflix series, Sparking Joy, launched at the end of August with much anticipation. However, we did not see a robust lift in correlated sales despite dedicating our front of store presentation to our exclusive and sustainable KonMari product line. Fortunately though, the strength of our new discovery areas within kitchen and closet helped offset the unmet expectation of KonMari product sales. With respect to our e-commerce channel, we continue to make progress in enhancing our online capabilities and reach. Our site speed and customer time to interact improved with every major technology update, and we are pleased with the initial reaction to the rollout of Instacart and Afterpay. Our Afterpay customers are over eight years younger than our average customer, and we are committed to building a long-standing relationship with this new, younger demographic. Additionally, we launched a new rating and review tool, enhanced badging on our product pages to identify sustainable and exclusive products, and are now actively working on simplifying the checkout process and streamlining our product pages. To help combat rising shipping costs and cart abandonment rates, we showed customers how much they could save by choosing a store pickup option when their online basket was below the free shipping threshold. This shift in messaging resulted in an increase in pickup orders. Our side enhancements have already created a cleaner customer experience, increased site performance, and lowered cart abandonment rates. We will continue to enhance our e-commerce experience by investing in modern technology stacks to reduce site friction and deliver a seamless customer experience. Shifting gears, I'd now like to speak about our incredible team. Whether at our stores, distribution centers, or support center, our teams are invaluable to the success of our business. And it is their dedication, passion, and resolve that has enabled us to deliver such outstanding results today. In fact, in our most recent 2021 Employee Pulse Survey, our team members overwhelmingly shared how proud they are to work for the Container Store, and that they are extremely excited about our future. Given the strength of our financial performance, we are pleased to be in a position to restore pre-COVID benefits, including merit increases and 401 matching, in addition to implementing variable-based incentive plans and increasing our minimum wage to $15 per hour for all employees. We remain diligent and steadfast in taking prudent steps to improve our employer value proposition and in being employer of choice. I'm immensely proud of our execution during the second quarter, especially given the fluid environment we continue to operate in. While we're not immune to the increases in raw materials and freight costs, we were able to mitigate this risk through price increases, less promotional activity, and by encouraging in-store pickups in Q2. Jeff will discuss our financial outlook and how these pressures are expected to impact us in the second half. But I believe our performance to date is a great testament for the caliber of our people and in the way that they are executing against our strategic pillars. A quick update now on our three strategic pillars. First, deepening our relationship with our customers. We know our customers value our product offering and the services we deliver. We believe we have an opportunity to enhance these relationships to help drive increased spend and expand our market share. We enter the holiday season well positioned despite the many headwinds in labor and supply chain. We are also armed with the valuable learnings from prior years where we have once again narrowed our holiday packaging and assortment, and we'll be using visual merchandising strategies in store to lean in to our strengths and our brand promise. Our Franchise Store presentation will spotlight our New Ways to Holiday campaign with our incredible kitchen assortment, inspiring customers to think of new ways to prepare their kitchens, pantries, and fridges for the holiday season. Our Holiday Kitchen product will feature baking sets and aprons from Food 52, cold brew, coffee makers, and cereal dispensers from OXO, and an exclusive product bundle from the crafting brand Cricut, which will enable our customers to create some amazing labels. Additionally, our buyers have done an amazing job curating new gift packaging and stocking stuffers that tell a compelling story. From reusable and sustainably soft gift boxes and bags to racially diverse Santa wraps and ornaments, our product offerings will highlight the many different and inclusive ways our customers celebrate the holidays. Lastly, our New Ways to Holiday campaign will also be supported by the rollout of zone specialists in key areas of the store to help assist and engage our customers. When it comes to branding that evokes emotion, we are pleased to share we are in the final development stages of our new brand campaign, in addition to the introduction of a new brand icon that will be recognizable for years to come. We anticipate launching both the new brand campaign and icon in late Q4. Finally, our pop program continues to grow. At the end of Q2, we had 10.5 million pop stars enrolled, As a reminder, about 75% of sales are linked to our POP program. We believe we can enhance our loyalty program by rewarding a deeper level of engagement with a new tier-based loyalty program, which we also aim to launch in late Q4. Moving to our second strategic pillar, expanding outreach. We are thrilled to share we have entered into an exclusive multi-year marketing partnership with Cassandra Arsham, founder of the Clutterbug Organizing Method, author of four best-selling books, and host of HGTV's Hot Mess House. Cassandra has an approachable style we know will resonate with customers interested in transforming their lives through the power of organization. She will create content for our brand to showcase a simple and approachable way to organizing that our customers can implement themselves with the help of our extensive product assortment. Additionally, plans are being finalized to expand our store network. We see the potential to add at least 100 additional doors in the coming years and anticipate the majority of these doors to mirror the smaller store format we plan to open next year in Colorado Springs, Colorado. We aim to concentrate our openings in a dozen key markets where we have the opportunity to gain significant market share. We believe these smaller format stores can actually be more productive than our larger format stores on a square foot basis. And we look forward to sharing more details in the coming months. Turning to our final strategic pillar, strengthening our capabilities. In Q2, we kicked off a materiality assessment project to help refine our ESG strategy. However, we're not waiting for the completion of that assessment to address our ESG footprint. During the quarter, we joined the U.S. EPA Green Power Partnership and will continue to take steps to lead the transition to a cleaner energy future. Additionally, I'm proud to share customers will now see a green leaf badge on product signs in-store so they can easily identify the more than 1,100 sustainable products we carry. Finally, I recently signed the CEO Action Pledge, which aims to rally the business community to advance diversity and inclusion within the workplace. Again, we are still in the early stages of our ESG journey, but we continue to make great progress. When it comes to technology, we are currently piloting a store inventory management system that shifts picking and packing work historically done in our stores to our distribution centers, creating added capacity for our stores to spend more time with customers on the selling floor Additionally, we are upgrading our store phones from traditional landlines to voice over IP. This change will not only reduce operating costs for each store, but will also allow us to efficiently route calls to our call center so that store specialists can, again, spend more time serving our customers in store. In closing, we are proud of our results today, and we could not be in a better position to go our brand. expand our footprint, and drive value for all of our stakeholders. Simply put, we are well on our way to becoming the best version of ourselves. I'll now turn the call over to Jeff.