Container Store (The)

Greetings. Welcome to Container Store's fourth quarter and full year fiscal 2023 earnings call. At this time, all participants are in listen-only mode. The question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time, I'll now turn the conference over to Caitlin Churchill with Investor Relations. Caitlin, you may now begin your presentation.

Good morning, everyone, and thanks for joining us today for the Container Store's fourth quarter and full year fiscal 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 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 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'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.

Thanks, Caitlin, and thank you all for joining us. I'll begin today's discussion by addressing two company announcements made this morning, followed by a review of our fourth quarter and full year performance. Jeff will then discuss the details of our fourth quarter financial results before we open up the call to questions. First, we reported receiving a notice from the New York Stock Exchange regarding noncompliance with their trading share price listing rule. We intend to consider available options to cure this deficiency and restore compliance, including a reverse stock split subject to stockholder approval no later than our next annual meeting late this summer. Second, in our fiscal 2023 press release, we announced today that our board has initiated a formal review process to evaluate strategic alternatives for the company in an effort to ensure we are maximizing both the potential of the business and returns for shareholders. The company's board of directors, along with the management team, do not believe the company's current market value is reflective of its intrinsic value and are committed to acting in the best interests of the company and its stockholders. The company is being advised by J.P. Morgan and Latham & Watkins LLP. As the Board evaluates potential strategic alternatives, we are suspending financial guidance. We will not be answering any questions related to these announcements at the end of the call. All available public information can be found in the press releases that were distributed this morning. We do not intend to comment further regarding the strategic review process until disclosure is determined necessary or advisable. Now turning to our fourth quarter and full fiscal 2023 results. We ended the fourth quarter with a 21.8% comp sales decline. as customers continued to contend with the macroeconomic pressures affecting their consideration of spend in the home improvement and organization categories. The challenges in general merchandise remained elevated, contributing to the majority of the sales decline. However, we saw relative strength in custom spaces, particular with our premium lines, and remain encouraged by the slightly positive comp our premium lines delivered in Q4. We closed the year with $6.9 million in positive free cash flow. This past year, we navigated headwinds, which pressured both sales and profitability. However, we still made important progress in positioning the container store for long-term success through executing our strategic initiatives of deepening our relationship with customers, expanding our reach and strengthening our capabilities. In addition, we were extremely disciplined on the cost front, exercising tight expense control and taking difficult but necessary actions to reduce overhead costs against a declining sales trend. We asked for tremendous support from our teams this past year, and I'd like to thank each and every team member for their many contributions towards furthering our goals. I'd also like to thank our incredible vendor partners for their unwavering support and commitment to our partnership. Together, we are ensuring that the Container Store is poised to capitalize on the significant opportunities during a more normalized backdrop. I also want to emphasize that the consumer need for the Container Store and the comprehensive solution-oriented offerings we provide remain strong. In a recent survey we conducted of 2,000 homeowners in the United States, 40 percent shared that they are afraid of facing the clutter in their home, and more than 70 percent feel overwhelmed when their homes are untidy. We are uniquely equipped with the expertise, solutions, and services to solve the challenges these potential customers have across all areas of the home. With this in mind, we made significant progress towards helping our customers realize the many benefits of living an organized life. Highlights from the past fiscal year include, first, enhancing our custom spaces offering to give customers more solutions for their home with innovative additions like integrated European lighting, new on-trend finishes, and mesh door inserts to our premium wood-based Preston line, and diversifying our alpha offering with the soft launch of Garage Plus. Second, developing our in-home design service to make it convenient for customers to transform their spaces with more than 100 highly trained designers. These designers are focused on selling premium spaces and drove 87% of premium spaces sales for the year. Third, delivering newness and innovation across our assortment with the introduction of compelling new brands and discovery categories like Cadence, which offers original magnetic travel capsules, CalPak, which has brought modern luggage options to our assortment, and Fortessa, known for its innovative break-resistant barware. These new brands and categories have resonated well with customers and complement our core offering, so customers don't have to go anywhere else to complete their spaces. Fourth, strengthening our internal product sourcing and development capabilities. This enhancement enables us to create supply chain efficiencies and supports the expansion of our Everythink Organizer collection, which complements our Alpha Custom Spaces line. And lastly, expanding our accessibility through the opening of five new small format stores, including our 100th store, located in Princeton, New Jersey, a milestone for our company. The positive progress we made on deepening our connection with our customers and expanding our reach is demonstrated by strong net promoter scores across all areas of the business, including existing and new stores, custom spaces, focus, and e-commerce. In addition, we made impactful improvements to our site and saw strength in our B2B business throughout the fiscal year. On our site, we enhanced product detail pages with AI-driven content to streamline browsing and shopping experience, resulting in a 9% increase in add-to-cart rates An online appointment schedule feature was introduced for custom space design appointments, empowering customers to book directly online for in-home or in-store consultations or request a callback for assistance. And our online store local pages will rebound to improve local SEO performance and drive engagement with local events, leading to an almost 15% rise in customers reaching these pages via natural search. Additionally, Custom Spaces appointment booking surged 275% from these new pages. And finally, as it relates to our B2B business, we saw operational sales increase almost 5% over the last fiscal year. While we have achieved significant progress against our initiative, we've also gained valuable insights over the past fiscal year that we have incorporated into our planning. For example, We found through testing different promotional durations and messaging, customers engage more when there is a sense of urgency, and we continue to implement this learning in our future promotions. We also acknowledge that in today's challenging economic climate, there is increased price sensitivity. We see opportunities to pass savings on to our customers on certain items, as we benefit from decreased costs in raw materials and freight. While we have made steadfast improvements in our custom spaces assortment, we recognize the importance of delivering custom designs more quickly and within the budget expectations of our customers. And lastly, during a challenging year with constrained marketing budgets, we focused on immediate conversion efforts rather than long-term brand awareness. We reduced full-funnel marketing activities, which resulted in decreased awareness of our custom spaces business a segment that typically requires a longer consideration period. This, along with inconsistent messaging between general merchandise and custom spaces, further weakened our marketing effectiveness. With these key insights in mind, the long-term market share potential within the over 20 billion home storage and organization category remains as compelling as when we first outlined our growth objective two years ago. even considering the current economic challenges. We remain committed to delivering on our long-term objectives of driving growth in custom spaces to better capitalize on the $6 billion custom spaces total investable market, as well as stabilizing our general merchandise business. As I discussed on our last earning calls, we still believe we can grow custom spaces from 40% of sales to 60% of sales over time through expanding our assortment, continuing to build and strengthen our in-home and in-store design services, and increasing the focus of our marketing efforts to drive brand awareness for our solution-oriented offerings. As it relates to custom spaces, we expect fiscal 2024 to be a big year for Alpha. A marketing launch of Garage Plus kicked off in April, aligned with an Alpha sale campaign. and we're gearing up to the soft launch of our new Decor Plus line, also by Alpha. Our new Decor Plus line enhances our offering with features such as fully enclosed drawers and integrated lighting, delivering exceptional value through a modular component-based system. Additionally, there is continued innovation and newness coming to our premium Preston line, and we are committed to enabling our designers to drive meaningful improvements in their conversion rates, an area where we see significant opportunity. To start, we have initiated training for our designers on our centralized 3D design tool, enabling them to deliver designs to customers more quickly. We've also refined the compensation structure to better incentivize existing talent, while also attracting new designers to the container store. And we aim to increase the number of in-home designers by over 50% by the end of fiscal 2024. Turning next to our plan for general merchandise for fiscal 2024. As I noted, our goal is to stabilize performance in this area of the business, which has seen a greater impact from the macro environment and changes in customer spending behavior throughout fiscal 2023. The container store has always stood for the best selection and quality, and that will not change. But we also recognize the need to have various price points across our core storage and organization assortment. To deliver this, we plan to expand our private label offering and more closely collaborate with our vendor partners. By leveraging our newer product innovation and sourcing capabilities, we believe we are better positioned to effectively compete in general merchandise categories without compromising our reputation that is synonymous with quality. and also continue to provide complementary solutions that complete our Custom Spaces offering. Connecting Custom Spaces and general merchandise leads me to our marketing plans. As I mentioned earlier, we have tremendous untapped potential on the brand awareness front, especially as it relates to our Custom Spaces capabilities. Building this awareness is an important area of focus for us this year. We're excited to launch a new marketing campaign that more comprehensively and effectively showcases the transformative power of organization, highlighting why we, at the Container Store, are uniquely positioned to unleash it. Our campaigns will focus on three key elements of our solution-based offering for organizations, namely custom spaces, complimentary product offering, and organizational tips. Our MakeSpace 4 full-funnel marketing campaign will focus on connecting custom spaces and general merchandise and launches this month in five key markets. As we always do, we will be testing and closely measuring results to determine the best approach for expanding into other markets. We've also identified opportunities in our stores to help with awareness of our custom spaces offering. Our alpha line, will now have permanent fixtures in the front of the store as part of our campaign feature area, which is what the customer sees first when they walk through our doors. The displays will be brought to life with complimentary general merchandise rotated during each campaign and help reduce store workload since the displays themselves will remain in place year-round. Another component of our awareness-driving efforts will include buzz-worthy partnerships to support key initiatives throughout the year. These partnerships are designed to help us reach new customers through their audiences, and we will be amplifying them through PR and our own and operated channels as well. One media partnership with Hearst It's slated to go live later this month, featuring an incredible, relatable garage transformation for the editor-in-chief of Esquire magazine with our new Garage Plus line. As it relates to new stores, we expect to open four new smaller format stores in fiscal 2024, in line with our previously communicated plans. These stores will be built to suit with design and construction meeting our specifications before we take possession. and therefore requiring less capital spend. In summary, as we navigate the current challenging environment with discipline, we remain laser-focused on the long-term opportunity of our business and brand. We intend to continue executing on the key initiatives that will best position us to capitalize on this long-term opportunity while maintaining strong expense and capital discipline. We also continue to work with our financial partners on the future refinance of our credit facility. As always, thank you for your interest in the Container Store and our growth story. And now I'll turn the call over to Jeff to discuss our financial results in more detail. Jeff?