Container Store (The)

Greetings and welcome to the Container Store Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce your host, Caitlin Churchill, Investor Relations. Thank you, Caitlin. You may begin.

Good afternoon, everyone. And thanks for joining us today for the Container Store's third 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 companies 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 Stores 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 Q3 performance and Q4 expectations, and then update you on our strategic initiatives. Jeff will then review our financial results and outlook in more detail. As we anticipated, the third quarter continued to be impacted by ongoing macro-related headwinds, which led to a decline in customer traffic and transactions year over year. However, we are pleased to have delivered both top and bottom line results above our expectations, thanks to our incredible customer service, compelling holiday shop, and Preston product offering. We also benefited from a slight pull forward of our Transform with Alpha event. Consolidated net sales declined 5.6 percent, and we delivered adjusted earnings per diluted share of 8 cents compared to 28 cents in the prior year. We remain encouraged by the performance we continue to drive in custom spaces. On a comparable store sales basis, custom spaces increased 2.1 percent compared to the prior year, as a result of strength in our Preston and Alpha offerings. General merchandise, on the other hand, decreased 7.1 percent on a comparable store sales basis to the prior year, which once again reflects customers pulling back on their discretionary spending unless they're provided with a compelling reason to shop. This was evident during our Q2 back-to-school event and remained the case in Q3. For example, our customers responded positively to our holiday shop, which featured an incredible assortment of stocking stuffers and holiday wrappings. However, they were less engaged with our more traditional kitchen assortment, which was featured at the front of our stores. Despite the softness in general merchandise categories, Our stores continued to provide an air of excitement, delivering exceptional service for our customers, resulting in a retail net promoter score of 80, an increase of two points from the second quarter. Before I provide more detail on highlights from the quarter, let me briefly touch on the Q4 backdrop assumed in our outlook. As you saw from our Q4 guidance, we assume an intensification of the macro headwinds that we saw in Q3. This assumed intensification includes a further decline in general merchandise and a decline in alpha custom spaces as a result of customers purchasing fewer spaces. There are also two unique to the quarter headwinds reflected in our outlook. First, last year's 2022 promotion which supported the launch of our new branding campaign, Welcome to the Organization, resulted in record sales driven by a significant marketing investment. As Jeff will discuss in more detail, by not anniversaring this event, we expect a headwind of over 200 basis points to sales growth in the fourth quarter. In addition, we anticipate a headwind of over 200 basis points in the fourth quarter from the discontinuation of the Closet Works wholesale business, which we will continue to experience through Q2 of fiscal year 2023. As a reminder, we strategically discontinued the wholesale business to make our premium wood-based offering Preston exclusive to the Container Store. Our priorities in the near term will remain focused on profitability and positioning the container store for healthy, long-term growth on a path to $2 billion in revenue. We will remain diligent with our expense management while continuing to invest in our strategic initiatives, including new store growth and infrastructure investments focused on strengthening our foundation and enhancing our capabilities for the future. Now, let me turn our discussion back to the third quarter and the progress we continue to make with our initiatives focused on deepening our relationships, expanding our reach, and strengthening our capabilities. First, on deepening our relationships. As I mentioned, we are motivated by the level of customer engagement we continue to cultivate, especially during moments in the quarter. While we are pleased with the customer response to our curated holiday assortment of stocking stuffers and gift wraps, which performed better than general merchandise overall, we were disappointed by the results of our front-of-store kitchen spotlight and see opportunity to infuse more innovation, freshness, and seasonal relevance next year. With that in mind, and with the recent addition of our new chief merchant, we plan to refine our assortment in all categories to consistently create ways to surprise and delight our customers with fresh and complementary products to the storage and organization category. For example, we see an opportunity to expand on our complementary consumables in the home fragrance and plant-based cleaning categories, which are resonating extremely well with our customers. Additionally, we are thrilled with the early customer response to the expansion of our private label Everything Organizer collection in late December, which is being featured at our front of store spotlight. This versatile line of clear solutions was designed with professional organizers who helped us develop unique solutions like our new stackable egg drawer, which includes a drawer for easy access to 18 eggs, and our deep turntable with removable bins to accommodate larger items. Both of those skews are standouts in early sales. We've also made solid progress in the first year of our organized insider loyalty program, with more than 120,000 insiders tearing up in Q3. In fact, the month of December saw nearly 47,000 insiders tear up, the greatest number of customers to do so in one month since our program launched in March of 2022. All levels of the program continue to have a higher than average ticket, with loyalty members spending approximately 60% more than non-loyalty members. and top-tier experts spending an average of five times more than entry-level enthusiasts through the end of the calendar year. We have been building momentum with this group of valuable customers to keep them engaged, holding a successful virtual event for them in Q3, and extending exclusive new benefits for the new year to express our gratitude to our highest spending experts. Turning next to our focus on expanding outreach, As I highlighted, our custom space business continued to perform well in Q3, with average space value up 4.1% compared to last year, despite the macro headwinds. However, we continue to experience pressure on the number of spaces customers purchased during the quarter. That said, we remain encouraged by the reception we are seeing to our broader assortment I'm excited to introduce a new brand architecture and branding for the Container Store Custom Spaces in November that highlights the breadth of our offering. This included transforming what was the Custom Closets department in our stores and on our website into our Custom Spaces studio and reopening our Chicago showroom under the Container Store Custom Spaces name. This new expression of Custom Spaces allows us to push beyond Custom Closets and makes it clear to our customers that we can transform any area of the home. The launch of the Container Store Custom Spaces coincides with our first-ever Preston event, which rewarded customers with 20% off their Preston space for making a $500 deposit towards their custom space design. We are particularly pleased with these results, with the average ticket exceeding $8,000, and more than 25% of the spaces sold being non-closet spaces. which is promising as we continue to promote and deliver custom spaces for all areas of the home. We're also excited about the enhancements we're making to our pilot programs in the Chicago and Dallas markets, focusing on building up our custom space businesses. In addition to servicing those markets with our own in-home installation teams, Inclusive, Of branded vehicles, we are testing different targeted marketing approaches with campaigns on connected TV, digital media, radio, and direct mail, pulsing up various elements of the marketing mix in these two key markets. These market tests are providing key learnings on how we can most effectively increase awareness and leads of custom spaces in the future. This leads me to our store expansion plans. Our first small format store in Colorado Springs, Colorado, which opened in September 2022, continues to exceed our sales productivity expectations. And we are delighted to be experiencing similar success in our new Salem, New Hampshire location, which opened in January. During opening week in Salem, 70% of the customers were new to the container store, compared to 58% during the first week of opening at Colorado Springs. so we remain excited about the prospect of attracting new customers to the brand through new store growth. Additionally, our open-to-date net promoter scores at both stores are quite strong at 78 for Salem and 83 for Colorado Springs. We are on track to open our next new store in Thousand Oaks, California in early spring 2023, and we're targeting an additional nine new stores for the second half of fiscal 2023. These stores will be open in existing key markets and will be small format stores at approximately 12,500 square feet. We continue to expect to generate approximately $5 million in revenue per location, or about $400 per square foot in the first year, with a target year one store EBITDA margin of 20%. Lastly, we continue to make progress related to strengthening our capabilities. We've enhanced our store selling experience by rolling out new mobile express checkout to all our stores, allowing us to efficiently service more customers. And we've made notable upgrades to our custom spaces in-store design tool. The tool now offers new usability features, improving the overall design experience, including a 3D design view and the ability to upsell complimentary general merchandise products by adding it to the design itself. In addition, we had a total of 95 in-home design specialists by the end of Q3 who collectively contributed 25% of the total custom space sales for the quarter. We believe the addition of the in-home designers bolsters our ability to deliver an elevated experience and provides additional sales opportunities. Our continued emphasis on the custom space customer experience is reflected in the positive improvement in the Net Promoter Score for custom spaces which rose an impressive seven points from Q2 to 71. We have also continued to make enhancements to our mobile app and website while optimizing our site speed and performance. A few highlights include improving site speed across all key pages, resulting in an average 40% improvement in response time, implementation of an online chatbot for conversational commerce flows, and an AI-powered custom in-draw organizer tool that helps users determine how best to organize their draws. We are pleased at the reception to these enhancements and have been gratified to see an increase in our net promoter score for online transactions to 64, a seven-point rise relative to Q2. We attribute this rise to improvements in the online buying experience, including shipped and buy online pickup in-store purchases. In summary, macro environment notwithstanding, we are not standing still. We remain committed to building on the momentum we're making, executing our strategic objectives, and driving towards our long-term goals. We have a flexible and agile team, a financially strong balance sheet, and the ability and willingness to operate this business with great discipline as we continue to navigate this current environment. Will that help? hand it over to Jeff to discuss our results and outlook in more detail. Jeff?