Container Store (The)

Greetings and welcome to the Container Store second quarter 2022 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 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, Investor Relations, the Container Store. Please go ahead.

Good afternoon, everyone, and thanks for joining us today for the Container Store's second 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's 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 the highlights of our fiscal Q2 performance and then update you on our strategic initiatives. Jeff will then review our financial results in more detail and discuss our outlook. For the second quarter, we delivered bottom line results above our expectations, despite a shortfall in our sales performance. We continued to navigate a challenging consumer environment as we have seen customers change their discretionary spending patterns. We've also had a negative impact of 110 basis points in sales growth headwinds from foreign exchange. While consolidated net sales declined 1.2 percent compared to the prior year, we delivered adjusted earnings per diluted share above our expectations at 27 cents compared to 54 cents in the prior year. As discussed on the last earnings call, we expected the year-over-year earnings decline as we continued to absorb higher freight and commodity costs, restored expenses that were pulled back during the height of the pandemic, and made investments to support our path to $2 billion in sales. Our team did a phenomenal job at maintaining a strong cost discipline despite these headwinds. AND CONTINUE TO EXECUTE WITH EXCELLENCE. IT IS ENCOURAGING TO SEE THE CONTINUED STRONG PERFORMANCE OF OUR CUSTOM SPACES BUSINESS AND INITIATIVE DESPITE THE SOFTNESS IN OUR GENERAL MERCHANDISE CATEGORIES. WE REMAIN COMMITTED TO OUR STRATEGIC INITIATIVE TO SUPPORT OUR LONG-TERM GROWTH AND $2 BILLION REVENUE GOALS. AS REFLECTED IN OUR UPDATED GUIDANCE, WHICH JEFF WILL REVIEW IN MORE DETAIL, We expect many of the macro headwinds we faced in Q2 related to the continued inflationary pressures and rising interest rates to persist. While we recognize the more promotional environment we are in, we have experimented with our promotional cadence with varying success. Our expectation is to continue to manage profitability and top line growth thoughtfully. Additionally, we continue to remain disciplined on the cost front, prudently managing and allocating expenses while staying committed to our long-term growth plans. The near-term external headwinds notwithstanding, I'm very encouraged by the continued strength we have seen in our retail net promoter score of 78 for the quarter and the progress we continue to make against our key strategic priorities, which include expanding outreach, strengthening our capabilities, and deepening our relationship with our customers. We are as focused as ever on deepening our relationship with our customers. In Q2, we wrapped up a successful Back to College event to help our customers and their students get organized for the new school year. As a reminder, we created a compelling college shop at the front of our stores and online, partnered with direct-to-consumer brand Dormify to enhance our offering, and we had campus ambassadors in key college markets. We are pleased with the results of this event and see an opportunity to add new products to our assortment next year, in addition to starting the event earlier. Average daily sales for the event was double that of last year, with an average ticket 33% higher than last year. More than a third of our Back to College customers were new to the Container Store, and we enrolled them in our loyalty program, Organize Insider. We see Back to College as an opportunity to drive additional growth in the years ahead. Turning to our loyalty program, Organized Insider, we are pleased to see over 126,000 customers tier up in Q2, progressing either one or two tiers, as we continue to see a higher average ticket for loyalty members versus non-loyalty members at 61%. In Q3, we plan to invite our highest tier experts to an exclusive online event hosted by professional organizer Cass Arson to help our most valuable customers get their homes ready for the holidays. Also in Q2, we refreshed our impulse products located near checkout with a selection of cleaning products, many of which are non-toxic and plant-based and are not available at other large retailers. Some of the brands include Levant, Times, Noshinku, Koala Eco, and Common Good, with products ranging from counter sprays, hand and dish soaps, and much, much more. We are also proud that several of the brands we're carrying are female-owned. Early results indicate strong customer interest in our new offerings. As we look to the remainder of the year, we are delighted with our curated holiday products and how the offering has been brought to life online and in stores. The front of our stores will feature a kitchen spotlight, showcasing solutions to help customers with their holiday prep. Some key products will include our new private label pantry bins and entertaining essentials from our Rowan Acacia collection and bakeware essentials from Chicago Metallic Bakeware. We will also have our holiday shop of high-quality wraps, ribbons, bags, and tags in coordinating themes. And excited to offer our customers an assortment that is 48% exclusive to the Container Store. We also have an expansive assortment of gifts and stocking stuffers with over 130 new products this year. Also new this year, customers can choose from a variety of ready-to-give gift sets. boxed in themes from our stocking stuffer assortment. Finally, to encourage sales during this time period, our customers will enjoy a limited edition reusable tote in holiday red when they purchase $100 in gift wrap and or stocking stuffers. With regards to expanding outreach, we continued to see strength in custom spaces this quarter with comp store sales performance up 7% compared to last year. which partially offset the pullback in general merchandise we saw during the quarter. The customer response to our new premium wood baseline Preston began to accelerate in the second quarter. With Preston now offered in all stores, our teams are fully certified in design and sales activities, and we look forward to adding to our sales pipeline through our first ever Preston event earlier this month. This introductory offer is part of our strategy to gain market share in spaces over $2,000. We are excited about the opportunities we see ahead for Preston and are investing to expand the product line with new wood grain and super matte finishes and luxurious decorative accents, including reclaimed leather, glass countertops, and frameless mirror doors. All these product additions align with leading industry design trends, Additionally, we recently participated in Kips Bay Decorator Show House Dallas, in which we demonstrated the incredible capabilities of Preston. In partnership with two accomplished designers, we brought two primary closets to life that featured glass front cabinets, warm LED lighting used both vertically and horizontally, and a floating credenza wrapped in cold crocodile recycled leather with push to open drawers. Both spaces received high accolades from the interior design community. In addition to our focus on Preston, today we launched new branding, Custom Spaces, which moves our offering beyond closets and naturally aligns with key areas of the home, including closets, living, and garage spaces. Customers can learn more about Custom Spaces through a new section on our website or in the Custom Spaces studio in any of our stores. Online, we also added chat capabilities that not only support customers, but also allow for enhanced leads integration for future sales opportunities. We also continuing to invest in custom spaces through a new design tool, and I've added talent across the business in technology, engineering, and sourcing to name a few areas. Lastly, we have also begun to pilot our own in-home installation teams in both the Chicago and Dallas markets, inclusive of branded vehicles. By bringing this service in-house, combined with our Dallas pilot for in-home organizing, we will be able to deliver a comprehensive and unmatched customer experience comprised of organizing solutions, custom spaces, and in-home services. I believe we are well positioned to capitalize on the sizable growth opportunity ahead. At the end of August, we also kicked off our alpha savings for every space event, which concluded in mid-October. The event was a spend more, save more offer available only to our loyalty members. While our customer engagement for this event was only slightly down year over year, we noted that our customers purchased fewer spaces at a higher average space value, reflective of the softening of customer traffic and spend as a result of inflationary pressures and rising interest rates. Despite the current softness, we remain focused on long-term growth and are developing new and innovative premium alpha product that we plan to launch throughout next year. These offerings will span multiple spaces and will include elevated features. Turning to our store expansion plans, during the quarter, we opened our first smaller format store in Colorado Springs. Initial customer response has exceeded our sales productivity expectations in total and in particular for custom spaces. We remain on track to open a store in Salem, New Hampshire this winter and are excited to announce plans for the opening of our next location in Thousand Oaks, California in early spring 2023. As previously stated, we plan to open 76 stores by the end of fiscal 27. 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. Lastly, we continue to make progress related to strengthening our capabilities. We are leveraging technology across the organization, and it is elevating the customer experience of our multi-channel customer. As it relates to custom spaces, we not only launched our new experience online, but also enhance the lead platform to better understand a customer's omnichannel journey from lead to conversion. We also began rolling out mobile point of sale in stores for express checkout and assisted selling to help our customers more efficiently find solutions or sign up for our loyalty program. From 3D views in our online custom spaces design tool to an improved both experience and piloting an AI powered chat bot on our site and app, we believe our technology initiatives are enhancing the customer experience. Looking ahead, we will remain focused on execution of our near and long-term objectives. We are mindful of the macro backdrop and the prospects of a recession. However, we have spent the last few years paying down debt and fortifying our balance sheet, and we enter this period from a position of financial strength. Even as we tighten our spending and more closely manage our costs, we plan to continue to prudently invest in our strategic growth initiatives that support our path to $2 billion in revenue. With that, I'll now hand it over to Jeff to discuss our results and outlook in more detail.