Container Store (The)

Good afternoon, everyone, and thanks for joining us today for the Container Store's first quarter fiscal year 2023 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 May 26, 2023, 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 will begin today's discussion by reviewing highlights from our first quarter performance. Jeff will then discuss the details of our first quarter financial results, followed by our outlook, after which we'll open up the call to questions. As we discussed on our year-end call in May, we entered fiscal 2023 with the expectation that the macro environment would remain challenging. While we cannot control the impact it has on our customers and their spending, we can control our focus, and our focus remains steadfast on our strategic priorities of deepening our relationship with customers, expanding our reach, and strengthening our capabilities. We believe this relentless focus and disciplined cost management will enable us to advance our long-term goals of $2 billion in annual sales. While we implemented the cost cutting action plan shared on our year end call, our cost actions have not kept us from delivering an exceptional customer experience. In Q1, we delivered a record high store NPS of 81. For the first quarter, we delivered top line sales performance in line with our expectations. Although fueled by increased promotional activity from our test and learn approach, as we continue to focus on deepening our relationship with customers. These tests unlocked key learnings that will inform our go-forward promotional plans and better position us to deliver on our objective for this year. We believe when we provide customers with a reason to shop with us, they will. Therefore, we tested promotions in the first quarter with various durations and offer types. We saw better results when we created a sense of urgency for the customer. For example, we ran a six-day buy one, get one, 50% off offer that performed better on a per day basis than a 14-day offer. Another example of giving our customers a reason to shop is the ongoing effort we have put into infusing newness and innovation across our assortment. In light of our customers traveling this summer, we gave new life to our travel and on-the-go category with brands like CalPak, Rainz, and Thule. These products are both functional with a fresh aesthetic and include carry-on luggage, duffel bags, laptop backpacks, and belt bags, all of which are exceeding expectations. To note, we are pleased to see that new products are bringing new customers. In Q1, new customers to the container store accounted for 24% of new product sales. And we will continue to focus on categories like travel with potential for growth. College was another area we identified with growth potential. Our annual college campaign kicked off in stores and online in Q1 with a reimagined and expanded product assortment alongside our partnership with online dorm decor destination Dormify. While still early in the back-to-school season, college sales are off to a strong start as a result of the enhancements we have made this year. We also launched our online dropship program with Domify and several other vendor partners, which is exceeding expectations. In Q2, we expect to introduce sought-after brands that will enhance our core assortment, like socially conscious home goods company, Decidensory, who artisan crafty products are part of the anticipated 1,000 new SKUs coming to the Container Store throughout fiscal 2023. We plan to embark on a bold, evergreen campaign this fall to showcase our product innovation and newness and drive awareness of how our curated, innovative, and solution-oriented products can help transform lives. While we are pleased with the results we are seeing in response to the newness we are delivering, Incremental sales are more than offset by greater than expected declines in the home edit and Marie Kondo collections, and to a lesser extent, declines in the closet storage category driven by drop front shoebox and jewelry. We believe these greater than expected declines in our more traditional categories are symptomatic of the current macro environment. With respect to expanding outreach, while we have seen softness in our non-premium spaces, we continue to be pleased with our premium space results within custom spaces. Given the strengths we continue to see in the Preston line, we are looking forward to introducing more innovation in the assortment by offering superior European lighting compatible with smart homes, as well as diamond-weave mesh door inserts that pair beautifully with new Preston colors. We believe these innovative enhancements will elevate the Preston line even further. Regarding custom space services, we have 133 in-home design specialists who have successfully completed a multi-day in-person technical design training to enhance their skills and product knowledge. These design specialists are primarily focused on selling Avera and Preston premium spaces, which, as a reminder, represents a significant majority of the $6 billion custom space market. In Q1, premium spaces sold by in-home design specialists accounted for 80% of all Avera and Preston sales, compared to 71% in the same quarter last year and 75% in the previous quarter. As we previously shared, our custom garage offering is an area of opportunity we identified to expand. We are rolling out our premium Preston garage solutions to stores and we're excited to announce the all-new Garage Plus by Alpha, which we plan to launch later this year. Informed by customer feedback on our current Alpha Classic garage options, we developed new features and enhancements, including closed cabinets, lighting, full extension and soft-close deep drawers, and a freestanding workbench. These enhancements will truly elevate our overall garage offering. New online tools continue to elevate and differentiate our custom space experience. We soft-launched the My Custom Spaces portal to give customers a centralized spot to review their design, sign their purchase agreement, manage their payment, and track the status of the custom space lifecycle from inspiration to installation. This portal will provide our customers with a smooth and intuitive experience. In addition, we recently launched an enhanced online scheduler for customers to easily make in-store, in-home, or virtual design appointments on our website when they're ready to get started on a space design. As it relates to customer satisfaction of our custom spaces category, our net promoter score increased by nine points from Q4 of 2022 to 79. This gives us confidence. that our continued focus on innovation and service is making an impact. Turning next to our new store plan. We remain on track to open six new small format stores in fiscal 2023 and still see a pathway to significantly increase our store count over the coming years. This year's new stores will open an existing key market where we see white space. This fall we expect to open in San Mateo, California, Woodland Hills, California, and Princeton, New Jersey, followed by Gettysburg, Maryland, this winter, and Miami, Florida, and Huntington, New York, in spring of 2024. And finally, as we continue to strengthen our capabilities, I'm proud of the publication of our second annual sustainability report in Q1, which outlines the progress we have continued to make against our environmental, social, and governance strategy throughout fiscal 2022. One highlight I want to note is being recognized by the United States Environmental Protection Agency for our company's use of wind green power. Our teams are also hard at work with a new partner that will help us measure our scope three emissions, which include indirect greenhouse gas emissions of our supply chain. We are one of the first retailers to embark on this assessment, and we look forward to learning the ways in which we can further reduce our carbon footprint. To summarize, as we anticipated, it was a difficult start to a challenging year. We have revised our outlook to reflect current trends in the business that we are seeing in Q2. The backdrop notwithstanding, we remain focused yet agile on the customer experience and executing against our strategic initiatives to position the container store for long-term profitable growth on our path to $2 billion in annual revenue. I want to thank all of our teams their unrelenting hard work and optimism as we navigate this dynamic environment i'm confident that the steps we are taking today position us well to capitalize on the recovery in demand when it occurs i'll now hand it over to jeff jeff thank you satish and good afternoon everyone as satish reviewed our first quarter top line performance was in line with our expectations however

Our bottom line results were negatively impacted by our test and learn promotional activity as we continue to experiment with different events to engage with customers in the current environment and to a lesser extent, a lower than expected defective tax rate. Offsetting some of this pressure, however, was an ongoing commitment to disciplined expense management, including the planned actions we discussed on our last call.