Container Store (The)

Greetings and welcome to the Container Store second quarter 2023 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 second quarter fiscal year 2023 earnings results conference call. Speaking today are Satish Malhotra, Chief Executive Officer, and Jess Miller, Chief Financial Officer. After Satish and Jess 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 Storage 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 at 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 second quarter performance. Jeff will then review the details of our second quarter financial results, followed by our outlook. We'll then open up the call to questions. As we discussed on our last call, we expected a challenging quarter on consumer spending, impacted by long-term inflationary pressures, substantially increased interest rates, and overall market uncertainty. And that is essentially what we saw, a continued year-over-year decline in our customer traffic and fewer units being purchased by them, especially in our core and more value-oriented categories. The monthly cadence of our sales declines was steepest in July, which we primarily attribute to customer distraction with summer travel. Those declines did slightly moderate in August and September. Additionally, we benefited from the earlier than planned start of our 75th alpha anniversary event, which assisted us in delivering sales and adjusted EPS above the high end of our expectations. However, as we look to the second half of the fiscal year, we have slightly lower revenue expectations, and we now expect to be contending with challenges in gross profit given by sales mix and in SG&A expenses. all of which are driving changes to our full-year outlook, which Jeff will go over shortly. For Q2, overall consolidated net sales were $219.7 million, down 19.4% compared to the prior year period of $272.7 million. From a profitability standpoint, we delivered gross margin expansion, driven primarily by freight tailwinds, and shorter-run general merchandise promotions, which was a learning we took away from our Q1 test. The gross margin expansion partially offset the significant expected SG&A deleverage, leading to adjusted income per share of one cent. This was above the high end of our expectations and driven by the execution of our SG&A reduction plan. With sales headwinds notwithstanding, I am pleased with how our organization has remained focused on executing across our strategic priorities of deepening our customer relationships, expanding our reach, and strengthening our capabilities. We are aiming to position ourselves for outsized share gains when the market normalizes. Let me now provide some key highlights on our most notable accomplishments in Q2. As it relates to store experience and customer service, we are proud to receive high marks for our efforts in this area. Our store net promoter score remains strong at 81 for the second quarter. This score is a testament to the dedicated efforts of our store specialists. Their expertise extends from conducting educational demonstrations of our new premium products to providing exceptional service and specialized knowledge in their respective areas. Our organized insider loyalty program remains a key to deepening our customer relationships, with the average ticket more than 45% higher than non-loyalty members. Experts, our highest loyalty tier members, are spending five times more than our enthusiast members. In Q2, we enhanced the journey of our insiders through ongoing storytelling. Now, when a customer joins the program, they receive engaging and educational communication about our organizing solutions, custom spaces, and in-home services to ensure they understand all that we have to offer them in their transformational journey with us. On the product front, we continue to enrich our assortment with more premium and upscale items, which we believe not only drove new customers to shop with us, but was also positively received by existing customers as well. In fact, recent customer intercepts validated that our new premium products are giving customers more reason to shop with us, and that they see the Container Store as a one-stop shop for both their organizational and home beautification needs. For example, we saw great success with our Back to College campaign, which gives us the opportunity to engage with new and existing customers during an important milestone each year. To recap our 2023 efforts, we ran our annual college offer where college parents and college students could sign up to receive 25% off their purchases, curated a complete and compelling college shop with new to us categories in stores and online, and activated pop-up shops in 36 college campus bookstores nationwide. Our college offer brought in 35% new customers, saw a 68% increase in sign-ups and drove a 43% increase in sales compared to last year. From our fried and treed underbed storage to multi-directional woozy fans to an innovative three-door charging cart from Dormify, we attribute the campaign's success to positioning the Container Store as a one-stop shop for college with our enhanced and expanded assortment. In addition, we launched our uncontained branding campaign during the full product spotlight. This campaign supports our ongoing expansion into strategic growth categories that complement our core offerings, including on-the-go travel, dining, entertaining, home decor, and textiles. We introduced more than 400 new products across these categories in September. Unlike college and other new product introductions we have shared, sales have exceeded our expectations. We consider over 85% of the general merchandise in this introduction to be premium and includes brands like Cadence, which offers original magnetic travel capsules, the citizenry known for its socially conscious artisan-made home goods, and Fortessa, known for its innovative brake-resistant barware. This gives us confidence in our direction and focus on bringing in more upscale and premium solutions, particularly those that complement our premium custom spaces. Though this new product is a sales tailwind, it does come at a lower gross margin than some of our more mature and larger volume core and value oriented product categories. While we do expect to improve the margin profile of these new more premium products lines over time, we have updated our full year outlook to reflect the current impact of this mix on our gross margins. As we move into the remainder of the year, customers will see more new products and seasonal assortments during key periods, giving them more reasons to shop with us. Earlier this month, we introduced more than 1,000 products as part of our seasonal holiday offering, supported by an in-store and online holiday shop, digital and traditional marketing, including an elevated direct mail lookbook. Approximately 80% of this assortment is new. and almost half is considered premium, and 55% is limited distribution or exclusive to the Container Store. We believe it is our best holiday assortment yet. There are more gift-giving opportunities along with curated premium decor than we've ever had during this time period. For example, customers will discover festive table arrangements and decor that complement our holiday trends including a collection of artisan crafted stoneware from BeHome. Additionally, customers can explore elevated gifting opportunities, like exclusive and timeless leather travel essentials from QAnon, innovative and premium pet brands like Sable and Hidden, premium gift wrapping, holiday storage essentials, and so much more. On the custom spaces side, we have continued to see relative strength compared to our general merchandise performance. and resilience in our premium Avera and Preston lines, despite the challenging environment. With interest rates as high as they are, coupled with few homes in the market, we do believe we could benefit from customers investing in their homes more, which is one of the reasons we have been very intentional with our focus on strengthening our custom spaces offering. We ended the quarter with 135 in-home designers who are focused on selling premium spaces and drove more than 85% of premium sales in Q2. The effort we are putting into improving lead contact time quality service is reflected in our Custom Spaces Net Promoter Score, which continues to trend positively, an increase to 81, up two points from Q1. Additionally, we're adding an incremental investment in marketing in the second half of fiscal 2023 to support overall Custom Space awareness and lead generation. As previously shared, we look forward to launching Garage Plus by Alpha in November, which bridges the gap between our entry-level Alpha Classic and premium Preston Garage offerings and pairs strategically with our garage general merchandise. With features like lighting, fully enclosed wall and rolling cabinets, and a heavy-duty workbench, we are bringing to the market solutions our customers want at a competitive price. Moving on to new stores. We are successfully expanding outreach with an average of over 60% new customers shopping with us in these locations. We opened our San Mateo, California location before the end of Q2, and our new Woodland Hills, California location just over a week ago. We continue to be pleased with the productivity of our small format stores, specifically with the faster adoption of custom spaces, which is averaging 39% of sales per store. In addition, the Net Promoter Score for our small format stores remained incredibly strong at 83. Looking ahead to the remainder of the fiscal year, we expect to open three more small format stores for a total of five. Our previously announced Miami location will be shifting to fiscal 2024 due to construction delays. To highlight one of our technology initiatives in Q2, we have started testing AI-generated content on our website to create efficiencies and personalize the online experience for our customers. This content is now automatically generated based on sophisticated prompts that incorporate customer reviews, rich vendor partner content that allows us to enhance product display pages, providing even more compelling reasons to buy and greatly improving search capabilities. And finally, as I've said many times, our employees are the lifeblood of this company and all contribute to its long-term stability and growth. Investing in our people and recognizing their contributions is critical in remaining an employer of choice. In Q2, we announced the reinstatement of our annual employee pay increase for eligible employees effective October 1st. Like everyone, our people are contending with inflation, higher cost of living, and other economic pressures, and we firmly believe this pay increase is the right thing to do. We also added back some store payroll hours, and our revised SD&E outlook now reflects these decisions. Additionally, we launched a new recognition program, TCS Appreciates. This program facilitates peer-to-peer celebrations to acknowledge the ways that our team members exemplify our company's foundation principles every day. Before I turn the call over to Jeff, I want to reiterate our conviction and our strategy that we believe will serve us well and deliver share gains when consumers begin prioritizing investments in their homes and market conditions normalize. We have a strong balance sheet in place and believe we are navigating today's environment with exceptional discipline while ensuring we further strengthen our competitive position. With that, I'll now hand it over to Jeff. Jeff?