Container Store (The)

Greetings and welcome to the Container Store fourth quarter 2022 earnings 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 of Investor Relations. Thank you. You may begin.

Good afternoon, everyone, and thanks for joining us today for the Container Store's fourth quarter and 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 begin today's discussion by reviewing highlights from our fourth quarter performance and the great progress we made in fiscal 2022 against our strategic initiatives before discussing our current views and plans for 2023. Jeff will then review the details of our fourth quarter financial results, followed by our outlook. We'll then open up the call to questions. Excluding the impact of non-cash impairment of goodwill, we delivered results for the quarter in line with our expectations. This included the anticipated decline in general merchandise and alpha custom space sales as a result of slower traffic and customers purchasing fewer spaces. As a reminder, we were up against a tough comparison, given our decision to not anniversary a very successful 2-22-22 event from last year, along with the strategic discontinuation of our Closetworks wholesale business. Given these factors and the ongoing challenging macroeconomic environment, fourth quarter consolidated net sales declined 15 percent, and adjusted earnings per diluted share was 18 cents compared to 46 cents in the prior year. During the fourth quarter and throughout fiscal 2022, despite the backdrop, we maintained a strong focus on executing our strategic initiatives of deepening our relationship with customers, expanding our reach, and strengthening our capabilities. The following accomplishments would not have been possible without the unwavering support from our teams, and their efforts allowed us to plant numerous seeds for future growth. In fiscal 2022, we launched multiple new large-scale programs to improve our product offering and customer experience. Five noteworthy accomplishments I want to discuss today include launching the Container Store Custom Spaces branding and Preston product offering, introducing new product categories to give customers a compelling reason to shop, significantly improving our e-commerce experience, relaunching our loyalty program, and opening new small format stores in key markets. During the year, we introduced new branding, custom spaces, to move our offering beyond closets to key areas of the home, including closets, living, and garage spaces. In addition, we brought to market our newest premium wood baseline, Preston. We added a minimum of two Preston displays to all stores in our custom space studio and created a new destination on our website for customers to find inspiration and to connect with our newly established in-home design specialists. During fiscal 2022, we had an average of 95 in-home design specialists who sold $75 million in total sales, with more than a quarter of them selling over 1 million each in custom spaces. We began refining our general merchandise assortment to not only drive profitability, but also to make room for new products that complement our core storage and organization solutions. We successfully launched several new categories to further entice customers, and we're pleased with their performance thus far. These categories include home fragrances, sustainable cleaners, and our new private label, Everything Organizer Collection, which features patent-pending designs. Also, we are very proud to have recently been named to Forbes Customer Experience All-Stars List, which we believe is a testament to our strong retail net promoter score of 80 in Q4. To create a flagship experience across our brand touchpoints, we significantly improved our e-commerce platforms. During the year, we enhanced our both experience, which recently drove a record-level BOPUS Net Promoter Score of 72. And we rolled out Express Checkout to all stores, which now accounts for 20% of all store transactions. We're also pleased with the response to our mobile app, as we've seen over 450,000 first-time downloads and a 4.8-star rating in the Apple App Store. Additionally, we improved the functionality and design of our website, including over 40% faster page speeds, timely customer communications, and a redesign of our navigation. It is now easier than ever to search, shop, and check out online or to connect with an in-home custom space designer. Regarding our loyalty program, we launched Organized Insider this past year to not only attract new customers, but also to reward a deeper level of engagement with existing customers. The new loyalty program has been well received and accounted for nearly 80% of total sales in fiscal 2022, and a 57% higher average ticket than non-loyalty members. During the fiscal year, we enrolled nearly 900,000 new members to our program, and with our new vice president of loyalty in place, we're looking forward to continuing to refine our program to further increase customer engagement. Finally, we are pleased to have opened three new small format stores this past year in Colorado Springs, Colorado, Salem, New Hampshire, and Thousand Oaks, California. We are encouraged by the customer response to our new small format stores as illustrated by our strong NPS scores, which recently for the month of April averaged 87 across all three, which gives us continued confidence in our long-term store expansion goals. As we look to fiscal 2023, we expect it to be a tough year considering the intensified macroeconomic headwinds which are driving reduced traffic and lower average tickets. Despite this backdrop, we remain committed to investing in our long-term growth prospects while still proactively managing our cost structure. We believe the actions we are taking position us well to deliver on our goal of low double-digit operating margins when the macroeconomic environment improves. As we continue to focus on gaining market share in spaces over $2,000, which is an important enabler of our path to $2 billion in revenue, we aim to bring better awareness to our new custom space branding and provide a whole home solution to our customers. We plan to increase the number of in-home designers to 150 this year, with design training focused on selling premium spaces. In addition, we plan to build on the success Preston is having, and we have product enhancements planned for the year, including premium in-draw and toe-kick lighting, mirrored glass, aluminum-framed doors, slim shaker profiles, and new on-trend colors like night sky blue and lakeshore green. This year, our custom space campaigns are expected to not focus on an individual line, but afford customers discount on any of our three lines, Alpha, Avera, or Preston, and are planned to be evenly spaced throughout the year. We're also working to create a custom spaces portal for customers to review their design, sign their purchase agreement, manage their payment, and track the status of the custom space lifecycle from inspiration to installation. We are also exploring the ability for customers to experience their design space through virtual reality technology so they can visualize and interact with their space, making their purchasing decision easier. VR technology also enables us to showcase custom space finishes and accessories that we may not carry in every store, and we intend to start piloting this in late fall. As we look at general merchandise under the leadership of our new chief merchant, we are focused on continuing to refine our assortment in a manner that best aligns with our customer shopping journey and has the most potential for growth, including college, travel, dining and entertaining, and home decor. We strategically started our college campaign earlier this year to align with parent and student prep timelines, and we're thrilled to offer new college essentials like a single serve coffee maker, sleek desk lamps, vintage fans, and essential oil diffusers. For the second year, we are partnering with Dormify, the online destination for dorm decor. The partnership is expected to expand this year with five of our stores in key college markets featuring Dormify pop-up shops with selections of on-trend mix and match bedding and more. We're also excited about the ability to drop ship Dormify products from our website beginning in Q1. The benefit of dropship allows us to expand our assortment without having to carry additional inventory, and we intend to expand this capability with additional vendors quickly thereafter. With regard to new products, we anticipate introducing nearly 1,000 new SKUs this year from innovative brands, such as Cadence and Canopy, both of which are entering brick-and-mortar stores for the very first time. The Cadence travel system will be exclusive to us and features customizable, magnetic, and leak-proof capsules to store personal care products in. As part of our college assortment, the Canopy Humidifier features no-miss technology, which is free from bacteria and particles, creating an optimized environment for beauty and wellness. These products will bring notable newness to the container store, and we are proud to partner with and help grow these innovative brands that have demonstrated success selling directly to customers. While we intend to continue focusing on our core offering of storage and organization, we are excited for this newness we are infusing into our assortment, and we intend to embark on a new campaign to demonstrate to customers how our curated, innovative, and solution-oriented products can help transform their lives. We intend to strengthen our e-commerce presence with a focus on expanded content and storytelling, introducing new ways to shop and enhancing our custom space and mobile app experience. Our content aims to highlight what makes products unique and encompasses more videos across our product detail pages. New ways to shop online include a college shop with a frictionless one-click experience, so students or parents can add curated and bundled dorm essentials to their cart with ease. In addition, we're working on a new arrivals online experience where customers can see and shop the amazing new products we're offering. And we anticipate launching this soon. Taking customers' feedback into account, we plan to consolidate orders so they are receiving fewer boxes and provide new ways to make appointments with our in-home designers throughout the site. Regarding new stores, we expect to open six new stores during fiscal 2023 versus our original expectation of nine stores due to delayed timelines given the current environment. The three stores that were originally slated for the end of the fourth quarter of fiscal 2023 are now expected to open in early fiscal 2024. We still believe there is substantial white space and a path to open at least 76 new stores over time. We expect and are planning for the challenging macro headwinds to continue for the entirety of this fiscal year, with sales decline being more pronounced in the first half while still negative in the second half. We are cognizant of the importance of cost management and are continuing to evaluate all areas of our business to ensure an efficient cost structure to position us well to deliver our long-term goal of low double-digit operating margins. We are prioritizing investments in the areas of the business that have continued to drive strong productivity, while also investing in our strategic initiatives, which we believe will position us well to gain market share when the macro environment improves. With that said, we made the very difficult decision to take immediate cost management action, including elimination of open roles and a reduction of force of approximately 15% at our support center and less than 3% at our store and distribution center operations. These actions are intended to keep our SG&A expenses just below 50% of consolidated sales in fiscal 2023. Despite these difficult decisions, we have a solid foundation and the right teams in place to make progress towards our long-term goal of $2 billion in sales and low double-digit operating margins. With that, I'll hand it over to Jeff to discuss our results and outlook in more detail. Jeff?