Container Store (The)

Greetings, and welcome to the Container Store Third Quarter 2021 Earnings Conference 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 today's conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Ms. Caitlin Churchill, Investor Relations. Thank you, ma'am. You may begin your presentation.

Good afternoon, everyone. And thanks for joining us today for the Container Store's third 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 would like to remind everyone that certain matters discussed in today's conference call are forward-looking statements relating to future events, management plans, and objectives for the business and the future financial performance of the company that are subject to risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results 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, 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 our strong fiscal Q3 performance, followed by an update on our growth initiatives. Jeff will then review our financial results in more detail and discuss our outlook. Our third quarter results surpassed our expectations and demonstrated three consecutive quarters of growth in fiscal 2021 when compared to fiscal 2019. For the third quarter, consolidated net sales were $267.3 million, approximately a 17% increase compared to the third quarter of fiscal 2019. and a decrease of 3% compared to the prior year. From a profitability perspective, we delivered adjusted EPS of $0.28 compared to $0.05 in the third quarter of fiscal 2019 and $0.42 in the third quarter of fiscal 2020. Our third quarter performance when compared to 2019 was broad-based, with double-digit growth seen in both our general merchandise categories and in our custom closet business. In fact, for the third consecutive quarter, we delivered close to or above 20% growth in custom closets when compared to fiscal 2019. This growth was fueled by not only our affordable modular Alpha line, where we experienced our highest sales day in history with the launch of our Transform with Alpha event in mid-December, but also by our premium Avera line, which continues to average around $6,000 per space and continues to outpace fiscal 2019 and fiscal 2020 sales. In light of our continued strength we're seeing in our custom closet business, especially in our ability to sell custom spaces above $2,000, we felt the need to significantly bolster our custom closet and home solutions with the acquisition of Closetworks, which closed on December 30th, 2021. Closetworks is a Chicago-based manufacturer of premium custom wood-based spaces. From walk-in closets to home offices, wine storage, wall beds, and garages, Closetworks has developed custom spaces that have been tested and refined for over three decades. Customizations include a vast number of finish options, lighting, hardware, countertops, trim, and their distinctive and very innovative 360-degree organizer, which is a fully rotating system ideal for shoes, pantries, valet, and so much more. This acquisition not only provides us with manufacturing capabilities in the U.S., but also provides us with added capacity to grow and expand our business nationwide with a much superior assortment and allows us the ability to improve our margin profile on wood based systems. We are thrilled to welcome Closetworks to the Container Store family and look forward to meeting customer demand with an exceptional product offering. With respect to our general merchandise categories, we are delighted to have delivered an increase of 15.6% to fiscal 2019, which was only down 5.4% compared to last year. As a reminder, last year, our general merchandise categories benefited greatly from the launch of the Netflix series, Get Organized with the Home Edit. The strength in our general merchandise categories during the third quarter of 2021 was largely due to the strategic shift we made in highlighting compelling core products relevant during the holiday season while still offering a narrow yet highly curated holiday offering. For example, we featured an expanded assortment of kitchen products at the front of the store, which supported our New Ways to Holiday campaign. while our dedicated holiday display showcased captivating holiday wraps, which included racially diverse centers, sustainably sourced gift boxes and bags, and desirable stocking stuffers. The changes we made to revamp holiday this year drove strong customer engagement, which improved overall sell-through rates of holiday-specific merchandise, and also drove strong sales in our core categories, such as kitchen, storage, and closets. We were also pleased with our e-commerce performance in Q3, which was up 26.9% for online sales compared to 2019. Including curbside pickup, website generated sales were up 53% compared to 2019. Performance this quarter was powered by improvements in site browsing, product pages, and a continued focus on site speed. Since the initial shift to e-commerce at the start of the pandemic, we have continued to maintain a higher level of penetration above the pre-pandemic period. As I reflect on my initial 12 months as CEO, I'm very proud of how our organization has rallied around a singular vision to transform the lives of our customers through the power of organization. Together, we have delivered strong financial results, made strides against our strategic initiatives to drive growth and market share. We've also made progress on our goal of making the container store a $2 billion business over time. Now, while we are still in the early innings, we have accomplished a great deal and have much to be proud of. Now for an update on our three strategic pillars, starting first with deepening our relationship with our customers. Over the past year, we've not only improved our in-store shopping experience by adding hosts, zoning key areas, and by adding demonstrations, but we've also refined our promotional cadence and messaging to our customers. In addition, we have curated our product assortment to align with customer interests and values. For example, customers have loved seeing transformations of real spaces throughout our marketing materials, which you will see in our Transform with Alpha event. The before and after graphics and testimonials shown in-store and through all digital channels are what we believe differentiate us from the rest of retail. Additionally, we continue to expand our sustainable product mix and are pleased to offer approximately 1,600 sustainable SKUs in our assortment. We will continue to expand the number of sustainable products we carry, and we're excited to share our plans to launch an expansion of our Marie Kondo collection in the fourth quarter. This expansion will include more than 100 new sustainable products and will broaden Marie's reach in the home office and bath category. Additionally, our customers love the Home Edit's lightweight sustainable wood collection for the kitchen and drawers, which we carry exclusively. After a successful test period in select stores, we're adding the onyx collection to the existing sand collection to all stores in March. I'm very pleased with the product selection and design work our buyers are doing to further expand and strengthen our sustainable product links. Our continued focus on deepening our customer relationship while also driving profitability demonstrates the appeal of our brand and the strength of our offering. To that end, I'm excited to announce that later this month, we're expect to launch a new brand campaign alongside our new brand icon. The branding campaign, Welcome to the Organization, is an open invitation to all to learn and discover the power of organization. It is also an opportunity for our current customers to share their transformational journeys with others. And as we head into a new store growth mode, the new brand campaign will allow us to welcome new markets to our extensive product assortment, impressive custom closet solutions, and specialized in-home services. We're excited to launch this branding campaign to help customers discover the power of organization and join our movement. The welcoming will begin on 2-22-22, the last most organized day of the century. Lastly, at the end of March, we expect to launch a new tier-based loyalty program that we believe will not only attract new customers, but will also reward a deeper level of engagement with existing customers. Moving to our second strategic pillar, expanding outreach. We continue to win in selling custom spaces over $2,000. For example, in Q3, we held our second Avira-only event. Despite a pullback in the depth of this promotional event, we saw strong sales growth with spaces averaging $6,000 each. Our specialists are working hard to educate customers about our premium Avera line, and the results demonstrate we are making great progress with year-to-date sales of Avera far outpacing fiscal 2019 and 2020. The changes made to date in our promotional cadence also give us confidence in our decision to make changes to our annual alpha sale, which has now transformed with alpha. The sale is two weeks shorter in length, And the depth of the promotion is also decreased from our historical 30% off to 20% off purchases greater than 500 and 10% off purchases under 500. The event kicked off on December 22nd. As I mentioned earlier, we experienced our highest sales day in history. With regard to stores, we are excited to open our newest smaller format store in Colorado Springs, Colorado, which is expected to open in the fall of 2022. We're also excited to announce a second smaller format store in Salem, New Hampshire, which is expected to open in the spring of 2023. Our real estate team continues to develop the pipeline for additional new store opportunities, prioritizing key markets we believe present the most attractive growth opportunities. As a reminder, we see the potential to add at least 100 new stores in the coming years, which is in addition to the potential shop-in-shop concept we continue to explore. In addition to our brick-and-mortar expansion, we're also excited for the opportunities we see within e-commerce. As I mentioned, we have maintained a healthy e-commerce penetration and continue to identify ways to grow and improve our e-commerce experience. To date, we have made significant strides to enhance our site browsing experience, including a holistic redesign of our product listing page and product detail page. For example, our multivariate product pages will show customers additional size and color options of a product. We also recently launched smart filtering to allow customers to filter by the dimension of a product. This improvement assists them in finding the right item for their space, saving them valuable time on site. Lastly, I'm thrilled about our new mobile app, which we expect to launch this spring. It will be another way to meet customers where they are already shopping and will allow us to introduce them to our new loyalty program. This brings me to our third and final priority, strengthening our capabilities. Technology enhancements continue to be a core focus. Over the past year, we have added more payment options for customers, including the addition of PayPal and a mobile point of sale solution, both of which are expected to be available by the end of fiscal 2021. Also, we're pleased with our ability to attract great talent and recently hired an SVP of e-commerce and a new general counsel. We also conducted a third party pay equity study to ensure we are being equitable and inclusive in how we compensate our employees, regardless of race, age, gender, or ethnicity. When it comes to our ESG strategy, we completed the materiality assessment mentioned last quarter and are working on our first ever sustainability report, which is expected to be shared with our stakeholders this summer. From a manufacturing perspective, our modular metal-based manufacturing capability, coupled with our new premium wood-based manufacturing capability, will provide us the opportunity to not only benefit from improved margins, but it will allow us to deliver a custom and superior offering for every space of the home. In summary, I am tremendously proud of the execution of our amazing teams. Their air of excitement, attitude and endurance are the reason we are delivering strong financial results and making operational strides on our strategic priorities. We also are driving more profitable growth as we purposely reduce the depth, breadth and duration of our promotional cadence. As we look to the conclusion of our fiscal year, we are encouraged by our ability to strengthen our connection with existing customers and excited about the opportunity to welcome new customers to the organization. I will now turn the call over to Jeff. Jeff?