Container Store (The)

Greetings and welcome to Container Store's first quarter 2022 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 and zero on your telephone keypad. As a reminder, this conference is being recorded. I'd 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 2022 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 2, 2022, as updated by our quarterly reports on Form 10-Q and other public filings with the U.S. Securities and Exchange Commission. 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.

Thank you, Caitlin, and thank you all for joining our call today. I'll first discuss our fiscal 2022 Q1 performance, followed by an update on our growth initiative. Jeff will then review our financial results in more detail and discuss our outlook. Our first quarter results reflect a solid start to fiscal 2022 as they exceeded our expectations on the top and bottom line. I'm proud of our team's agility and performance. they continue to successfully navigate a dynamic consumer environment while staying focused on our long-term objective of reaching $2 billion in sales by the end of fiscal 2027. For the first quarter, consolidated net sales were $262.6 million, an increase of approximately 7.1% compared to the prior year. The outperformance versus our expectation was fueled once again by custom closets. From a profitability perspective, we delivered adjusted EPS of 21 cents compared to 36 cents in the prior year as we absorbed higher freight and commodity costs, restored expenses that were pulled back during the height of the pandemic, and investments to support our path to $2 billion in sales. Our strong Q1 results reflect the strength of our action as we reacted to the ongoing dynamic consumer environment. This environment particularly impacted our general merchandise business, as customers returned to more normalized summer activities and contended with increased inflationary pressures. Despite today's reality, our teams did well pivoting and delivering smart and engaging promotional campaigns that still drove profitable growth. As I mentioned, custom closets performed above our expectations, and we were pleased with the customer response to our Avera Premium Closets event, which helped deliver strong sales at lower promotional rates than the prior year. The Avera event was an organized insider event, requiring customers to be part of our loyalty program to be eligible for a discount. Additionally, we chaired this discount so that our most loyal customers, whom we call experts, received a higher discount. Total sales for the Avera event were nearly 9% higher than last year and further demonstrated our ability to sell premium spaces over $2,000 as the average space value was above $7,000, up 22% to last year. The tiered discount approach led to an average discount for the event that was less than 20% compared to a discount of more than 25% the prior year. Shortly after the Avera event ended, we continued to see strong engagement in custom closets through our More Space, More Savings Alpha event. And I look forward to sharing details of that event, which ended in mid-July, in our Q2 earnings call. Within general merchandise, despite a tough compare in closet and storage categories over last year, we were pleased with the strength we saw in our kitchen, office, and bath categories. Within our kitchen category, the home edit product sales increased over 50% compared to Q1 of last year. However, we were most encouraged by the growth of our private label, Everything Organizer Collection, which saw a triple digit increase over last year. Our bath category also benefited from sales of the home edit products, which were up nearly 40% in Q1 compared to last year. In May, we introduced a new wave of sustainable and elevated KonMari products in a variety of categories. Our office department benefited from these new products, as well as from our private label multi-purpose bins, which were recently introduced in new colors. As we look ahead, we have recently launched a compelling collection of premium home fragrances, featuring candles and diffusers from LAFCO, Pura, Capri Blue, and more. Early results indicate this is a highly productive use of space in our stores, which is why we plan to take it a step further and refresh our impulse products located near checkout with a selection of carefully curated and eco-friendly consumables. Our results this quarter also benefited from our new loyalty program, Organized Insider, which is a key priority given our focus on deepening our relationship with our customers Since the launch in late March, we have seen over 100,000 customers tear up, progressing either one or two tears. We are seeing a higher average ticket, over 60% for loyalty members compared to non-loyalty members. And when it comes to our top-tier members, our experts, we are seeing them spending five times more than our first-tier enthusiasts and are visiting twice as frequently. We're also seeing that our kitchen category is resonating most with our enthusiasts, whereas Alpha is resonating most with experts. We intend to capitalize on the opportunity to not only add new members to our loyalty program, but also to increase engagement and spend with existing customers so they can move up in their tiers. We've also made progress on expanding outreach through the strengths in custom closets and through our robust pipeline for new store growth. At the close of P1, Preston displays were installed in 60 of our 94 stores with plans to complete the rollout during the second quarter. As a reminder, Preston is our custom wood-based system that replaced our former offering, Laron. Preston offers built-in luxury in 11 premium finishes with a variety of door, hardware, lighting, and accessory options like a hamper, pull-out ironing board, and wine rack. This premier offering is suitable not only for closets, but for all areas of the home, including pantries, offices, and living spaces. Since launching Preston, we have built a strong pipeline of designs with a healthy average ticket of over $8,500 in Q1. As we laid out on our last call, we see significant white space to grow our store base. We are on track to open our first small format store in Colorado Springs, Colorado, in the second quarter of fiscal 2022, and we plan to open a second small format store later in the winter. As previously mentioned, we plan to open 76 new stores by the end of fiscal 2027. We anticipate one-third of these new stores to open by the end of fiscal 2024, and we have these locations targeted and active in our pipeline. As we continue to strengthen our capabilities, we are very encouraged with the momentum we are seeing with our mobile app, which launched in Q4 of fiscal 21. Over 80% of our mobile app users are loyalty members, and the app is converting at a rate double that of mobile web and with an average ticket of over 30% higher. While the app makes up just 5% of our web-generated e-commerce sales at present, it provides a superior customer experience compared to mobile, and serves as an opportunity to re-engage LAPS customers. Additionally, we were pleased with website-generated sales, which were up 2.2% for the quarter, as consumers are pulling back from pure online shopping and returning to stores. Given this consumer shift, we are strategically encouraging and incentivizing customers to buy online and pick up in stores, which helps save on freight costs. Our results reflect a solid Q1 performance, despite some periods of softness, primarily around holidays when consumers were enjoying summer activities or traveling. As we look to the rest of the year, we are revising our outlook to reflect the impact of inflationary pressures across our business, including higher interest rates. Despite this environment, we believe a continued focus on our objectives and executing our initiatives will position us to achieve our fiscal 22 goals and make progress on our path to $2 billion in sales. As we plan for Q2, we will be intently focused on back to college. We've created a compelling, can't-miss college shop at the front of our store showcasing must-have products for dorms and apartments. We've also teamed up with Dormify, a direct-to-consumer brand, to showcase their bedding, headboards, and lamps. and 10 of our stores located in key college markets. This partnership and the product showcase helped round out our college offering. To add to the success of our kitchen category, we have also launched a new and exclusive product line with New York Times bestselling author and YouTube star, Rosanna Pansino. The Rosanna Pansino collection by iDesign includes clear storage bins, canisters, mixing bowls, turntables, a cake dome, and more. These products are made of sustainable materials, including 100% recycled clay plastic and polowina wood. The collection is a fresh take on some of our best-selling kitchen products, and we look forward to seeing how our customer and Rosanna's audience respond. With the current economic backdrop, we also see our kitchen category as a great resource for families who are cooking more at home. We're also looking forward to launching our new custom spaces branding in Q2. We are strategically moving our branding beyond custom closets to custom spaces to help educate our customers that our metal and wood-based systems go beyond closets and that they're also meant for everyday living spaces, such as entertainment centers and garages. We'll continue to see a significant opportunity to drive results and gain market share in custom spaces. Finally, we are pleased to publish our first sustainability report this past June, reviewing key areas such as our product lifecycle and environmental impact, emissions and energy and diversity, equity and inclusion initiatives. We look forward to continuing to update our stakeholders on our progress with this work on an annual basis. Before I close, I want to thank our teams for their impactful contributions in delivering a solid start to the fiscal year and for their continued commitment as we navigate a dynamic environment. We will stay focused on our long-term goals while remaining nimble and flexible to the changing consumer environment. I will now turn the call over to Jeff to review our first quarter performance in more detail.