Container Store (The)

Greetings and welcome to the Container Store third 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, 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 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 at the SEC on May 26, 2023, as updated by our quarterly report on Form 10-Q and other public violence 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 the 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 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 third quarter performance, followed by a review of our key areas of growth. Jeff will then share the details of our third quarter financial results, followed by our outlook. We'll then open up the call to questions. As we discussed in our announcement last month, our third quarter sales results fell short of our original expectation. We delivered a year-over-year consolidated sales decline of 14.8%, largely driven by ongoing challenges in our core general merchandise categories. Despite these dynamics, we maintained a strong discipline with respect to our promotional strategy and expense management. to deliver adjusted loss per share of $0.08, which was within our original range of expectations. Furthermore, we were encouraged by the sequential improvement in year-over-year competitive sales decline of custom spaces over the second quarter. While the current macroeconomic environment still remains challenging, our teams are focused on executing against our strategic initiatives, leaning into the areas of the business that are delivering results. and positioning our sales to maximize the potential for longer-term growth, particularly with custom spaces. For the third quarter, despite experiencing declines in our core general merchandise category, we did see a positive reception to the introduction of new products to our assortment, with sales more than doubling against our expectations for these new products. In particular, our new premium products continue to do very well. Our analysis has shown that customers purchasing new premium products are returning more frequently and have a higher average ticket compared to customers who do not purchase 3C products. Additionally, our discovery categories are also performing strongly, with on-the-go travel solutions and home fragrances achieving double-digit growth in comparable sales relative to the third quarter of last year. Likewise, our premium custom spaces have also maintained robust performance, with sales experiencing only a slight decline compared to last year. thus outpacing the overall performance of customers' faces. Instead of that, we were pleased with the performance of our value-oriented alpha line, which celebrated its 75th anniversary with a special event that ended in the third quarter. The event's sale performance met our expectations, with notable sales being achieved towards the end of the event, as customers responded to the sense of urgency messaging that was conveyed in our marketing communications. Looking ahead to Q4, in addition to January's abnormal weather impact, we anticipate continued challenges to our core general merchandise category, similar to what we experienced in the prior quarters. As a reminder, Custom Spaces is expected to have a tougher sequential comparison, as mentioned in our prior call, due to the additional promotional event this year to celebrate ELFA's 75th anniversary. We also expect SOFA software alpha product-related sales during the planned non-promotional time period in the fourth quarter. In response to our top-line performance, we remain committed to exercising strong discipline with both our promotional strategies and expense management. Furthermore, we look to action additional areas of optimization and include proficiency. As we look forward to fiscal 2024, we believe the need for the container store has never been greater. Over half of Americans are overwhelmed by the amount of clutter they have, and the vast majority have no idea what to do about it. Many resort to renting outside storage or find themselves unable to use the garages or parking due to the poor utilization of space in their homes. They need our help to reclaim not only their space, but their time, their money, and their lives. That's the journey we've been on these past few years. and the purpose we have been living out, to help our customers transform their lives through the power of organization. While we are uniquely positioned with our comprehensive solution and services, we recognize the need to increase awareness about what we offer. This includes leveraging accolades such as the recent Recognition by Time, which made Alpha and Preston as top picks within several of their best closet system categories. Tuning to the key growth areas of custom spaces and general merchandise will be focused on in fiscal 2024. While custom spaces has traditionally accounted for approximately 40% of our sales, given current sales trend and identified opportunities, we believe we can grow this penetration to approximately 60% of sales over time. We aim to fuel custom spaces growth in three distinct ways. First, through our expanded assortment. As we have discussed before, we are continuing to drive innovation and newness within our custom spaces line. We have recently expanded our garage offering with Garage Bus by Alpha, which self-launched in late November. We are seeing the new features and functionality like enclosed wall and rolling cabinets, lighting, full extension drawers, and heavy-duty workbench already resonate incredibly well with our customers and look forward to efficiently launching it this spring. Later this calendar year, we also plan to launch a significant overhaul of our Alpha Decor line that will elevate its positioning in the marketplace. Our Preston line is also expected to grow in its offering, just as we had done earlier this fiscal year, with more premium options like leather draw funds, matte finishes, and enhanced lighting. We're excited to be working on adding a fully concealed hardware option for Preston, which we expect to be a material differentiator in the marketplace. Secondly, we plan to grow our custom space business through our specialists, whether they be in-store designers supporting alpha or in-home designers supporting our more premium line. Today, we have almost 140 highly trained in-home designers focused on selling premium spaces, and they continue to perfect their selling strategy, speed of design, and their design capability. In the third quarter, 92% of premium space sales were driven by our in-home designers. we plan to increase our number of in-home designers and are working diligently to significantly improve our press and design to sold conversion rate, which is currently about two-thirds of what we experienced with our premium Avera line. When combined with the total industrial market opportunity, this provides us a long runway of growth and potential share gains within custom spaces. Finally, we anticipate custom spaces growth to come from increased awareness. Many customers today are rather not aware that we offer custom spaces or have yet to engage in this category. We aim to change that by being far more intentional and leveraging data to drive our marketing strategy. For example, through recent analysis, we reaffirmed that the majority of customers who have purchased Preston and Alpha spaces heavily shocked our kitchen and closet general merchandise categories first. Leveraging insights like these will help us make more impactful decisions as we attract new customers and launch them on their custom space journey. Furthermore, our marketing assets will aim to take a more integrated approach, demonstrating our ability to facilitate life-changing transformations for our customers through space optimization, curated finishing products, and vital organizational advice. This approach aims to not only allow customers to achieve their transformational aspirations, but also ensures that their newly found achievements are maintained over time. As we intensify our focus on custom spaces, our merchandising team is hyper-focused on refining and rebuilding our general merchandise assortment to complement our custom spaces offering for a complete solution. With respect to general merchandise growth, We also plan for it to come from three distinct areas. First, through our expanded premium assortment. As we shared, we are pleased with the reception of our new premium general merchandise and see an opportunity to grow this offering with an improved margin profile. This includes high-quality artisan bins and baskets to complement a Preston closet and crystal glass and barware to complete a Preston pantry. Offering premium general merchandise to complete our premium custom spaces is essential to serve the needs of our customers and offers them a full solution under one roof. Next, we plan to grow our exclusive private label business through our new sourcing capabilities that we brought in-house last year. Our Growing Everything Organizer collection is a great example of an exclusive, value-oriented offering that can work in any space and complements our offer solution. the healthy margins private label products provide, and the opportunity to develop products that seamlessly integrate with our custom spacing make this area crucial to our general merchandise growth. Currently, 40% of our general merchandise is open to this private label, and we see an opportunity to increase it further over time. Lastly, we believe we can achieve growth in general merchandise through our discovery categories that complement our core offerings. Discovery categories like home fragrances and on-the-go travel solutions continue to trend positively, presenting us with significant opportunities in these areas. Before I close, I want to touch on our updated outlook for the remainder of the year and our disciplined focus on capital allocation. With respect to store openings, we're on track to end fiscal 2023 with five new locations and recently celebrated our 100th store opening in Kingston, New Jersey. We continue to see high penetration in custom spaces and high customer satisfaction in our small format stores with an average net promoter score of 81 Q3. In regards to fiscal 2024, we plan to open four new built-to-suit locations, which, as a reminder, require far less capital outreach. We also plan to relocate our San Francisco store in late June and have made the decision to close our store in Los Angeles at Farmer's Market. We closely monitored the profitability of our stores and decided it was not in the company's best interest to renew the lease when it ends in August of 2024 due to a significant rent increase. Furthermore, given the current environment, we are not committing to the timing of future store growth beyond 2024. While we continue to see significant opportunities to expand our national presence, it will be done in conjunction with our goal of sustained positive free cash flow. Despite the current macroeconomic difficulties and the obstacles encountered within our core general retirement categories, we remain optimistic about the growth opportunities we have identified. Our belief in the transformative power of organization, coupled with the demand for it, and our unique solution-oriented offerings fuels our confidence. Marrying this focus with the passion and the strength of our team lays a solid foundation for enduring success.