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spk03: Greetings and welcome to the Container Store's first quarter 2024 earnings call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference call, please press star then zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Caitlin Churchill. Please go ahead, ma'am.
spk04: Good afternoon, everyone, and thanks for joining us today for the Container Store's first quarter fiscal year 2024 earnings result conference call. Speaking today are Satish Malhotra, Chief Executive Officer, and Jeff 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'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 28, 2024, 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. Satish?
spk02: Thanks, Caitlin, and thank you all for joining us. I'll begin today's discussion with a review of our first quarter performance, and then Jeff will discuss the details of our financial results before we open up the call to questions. Now turning to our first quarter results. While we continue to contend with a challenging macro environment, we were encouraged by the sequential improvement in year-over-year sales trends we delivered in the first quarter compared to the fourth quarter. Comparable sales declined 13.7% for the first quarter and reflected sequential month-over-month improvement in both general merchandise and custom spaces as the quarter progressed, with notable improvements in June. General merchandise experienced a 21.8% decline in comparable sales, while custom spaces delivered a positive 1.9% increase in comparable sales for the quarter. We attribute the change in custom space and sales trajectory to the enthusiastic response to our Garage Plus and Decor Plus by Alpha launches and our premium wood-based Preston line, which had the best sales order quarter in its history. Additionally, we saw a 300 basis point improvement in our gross margin rate due to reduced freight costs, continued disciplined promotional activity, and favorable product mix. With respect to profitability, adjusted loss per share was $0.26 for the first quarter, compared to a $0.21 loss in Q1 of fiscal 2023, which was a result of deleverage of fixed costs on lower sales, despite the gross margin improvement. I wanted to take a moment now to recognize our team. for their continued dedication and outstanding customer service. Despite the challenging macroeconomic backdrop, our teams from the support center to the distribution centers to our stores remained committed and focused on positioning the container store for success. Their hard work was rewarded this quarter by delivering exceptional net promoter scores across our retail stores, custom spaces, and buy online, pick up in store orders. Based on our latest survey work, we once again confirmed consumers continue to have an undeniable need for our unique offering. We learned that one half of Americans believe they have at least one room in their home that is overwhelmed with clutter, and that the average American wishes they had three more rooms in their home to have space for all their belongings. Our custom space systems, complementary organizing solutions, and in-home services give customers the power to overcome their clutter and utilize the existing space they have in ways they did not know possible. Additionally, we recently hosted our second vendor summit, which drove incredible energy and excitement across our vendor base. During the summit, we focused on our strategies including deepening our relationship with customers, expanding our reach, and strengthening our capabilities, while also highlighting our no-term priorities for fiscal 24 that we discussed on our fourth quarter earnings call. These include growing our Custom Spaces business through expanding our Alpha and Preston offerings, stabilizing our general merchandise business, and increasing brand awareness. Following the summit, We believe there is a renewed level of conviction in our brand from our partners who are thrilled to see our ongoing focus on our core products. In addition, they are looking forward to working closely with us on expanding our core offering and providing complementary solutions that complete our custom spaces. As I mentioned, we were pleased to see custom spaces deliver a positive come for the first quarter especially given the prevailing macro-related headwinds. Our design specialists are getting better and better at leveraging our improved design tools and converting leads, especially for our Preston line, which delivered a record quarter, as I mentioned earlier. We continue to see opportunity to double our Preston business by improving conversion rates and believe we are on a path to achieving this over time. We're also generating great engagement throughout enhanced product offering with Alpha. Following the launch of Garage Plus by Alpha last fall, we kicked off a marketing campaign in the spring to bring awareness to our newest line. As part of this campaign, we collaborated with Jason and Kylie Kelsey, as well as Michael Sebastian, editor-in-chief of Esquire, to transform their garages into calming spaces that are now both functional and aesthetically pleasing. These real-life transformations resonated with both our customers and their audiences across marketing channels and resulted in notable media coverage. The positive trends and reception we are seeing for Garage Plus can be attributed to the marketing efforts we launched in April. During the quarter, we were excited to finally reveal further innovation in our modular wall-hanging custom space offering with the launch of Decor Plus by Alpha in June. This new system gives customers elevated options like LED lighting, back panels that give their space a built-in look, and the fully enclosed birch wood drawers they have been asking for. It comes at an exceptional value and in a system that they can do it themselves or have professionally installed. While still early days, the launch has been well received by our customers, and is generating a lot of excitement in stores. The initial response to these recent alpha launches only strengthens our belief that we can grow custom spaces from 40% of sales to 60% of sales over time. We'll continue to expand and innovate across our assortment, build and strengthen our in-home and in-store design services, and sharpen the focus of our marketing efforts to drive brand awareness for our differentiated solution-oriented offering. Turning next to the work in stabilizing our general merchandise business. With 94% of our customers shopping general merchandise, it is essential that we focus on ensuring we are always in stock in the critical traffic-driving core skews while still infusing newness and innovation. This includes new core premium products to complement custom spaces, plus discovery products to build the basket. In our stores, we are reallocating space and inventory to be more effective, more reflective of our core storage and organizing offering, which is resulting in significant improvements in productivity. During the quarter, we relocated our downtown San Francisco store and opened a new location in Springfield, Virginia. The new store in Springfield saw a great response with more than 100 people waiting in line on the first day. And the relocation in San Francisco is off to a strong start as well. Most recently, following quarter end, we opened another new store in Virginia in Ashburn. Again, our team experienced a robust welcome and excitement from the community with more than 100 people waiting in line on opening day. We're still on track to open two new stores in Florida later this year and look forward to a similar reception from those communities. In summary, while we cannot control the current macro environment, we are pleased with the progress we are making on our initiatives and continue to believe in the opportunities ahead as more and more customers realize the power of organization. We are controlling the controllables, tightly managing expenses and capital while strengthening our competitive positions. all of which will serve us well when the market condition normalizes. The board and management continue to work on plans to refinance our credit facility and concurrently are continuing to review strategic alternatives in an effort to ensure we are maximizing both the potential of the business and returns for shareholders. We will not be taking any questions regarding the strategic review process at the end of the call, nor do we intend to comment further until disclosure is deemed necessary or advisable.
spk08: And now I'll turn the call over to Jeff to discuss our financial results in more detail. Jeff? Thank you, Satish, and good afternoon, everyone.
spk01: As Satish reviewed, our first quarter results reflect sequential month-over-month improvement through the period and ongoing relative strength within custom spaces, which delivered positive, comparable sales growth for the quarter. For the first quarter, consolidated net sales decreased 12.2% year over year to 181.9 million. By segment, net sales for the container store retail business were 171.5 million, a 12.1% decrease compared to 195.1 million in the prior year. The decrease is inclusive of a comp store sales decrease of 13.7% driven primarily by the 21.8% decline in our general merchandise categories, which negatively impacted comp store sales by 1,440 basis points. Custom Spaces comp store sales increased 1.9% compared to last year and positively impacted comp store sales by 70 basis points. Sales from non-comparable stores were a net benefit to total TCS sales of 160 basis points. For the first quarter, fiscal 2024, our online channel decreased 25.6% year over year, and our website-generated sales, which includes curbside pickup, decreased 19.2% compared to last year. Website-generated sales represented a total of 22.2% of TCS net sales in Q1, which is 200 basis points lower than 24.2% in Q1 of last year. Unearned revenue decreased to $16.6 million in Q1 this year versus $17 million last year, which is reflective of the decline in overall sales. Alpha third-party net sales of $10.3 million decreased 13.7% compared to the first quarter of fiscal 2023. Excluding the impact of foreign currency translation, alpha third-party net sales decreased 12.4% year-over-year, primarily due to a decline in sales in the Nordic markets. From a profitability standpoint, our consolidated gross margin for Q1 increased 300 basis points to 58.3%, compared to 55.3% last year. By segment, TCS gross margin increased 340 basis points compared to last year, primarily due to freight tailwinds decreased promotional activity and favorable mix in Q1 of this year. Alpha gross margin increased 470 basis points compared to last year, primarily due to price increases to customers. Consolidated SG&A dollars decreased 6 million or 5.4% to 105.4 million compared to 111.4 million in Q1 last year. As a percentage of net sales, SG&A increased 410 basis points year-over-year to 57.9%. The increase is primarily due to deleverage of fixed costs associated with lower sales and increased marketing spend in the first quarter of fiscal 2024. In the first quarter, we recorded $900,000 of a long live asset impairment related to a store which has been identified for closure in fiscal 2024. Also in the first quarter, we recorded $1.7 million of other expenses, almost all of which is legal and professional fees related to strategic alternatives incurred in the first quarter of fiscal 2024. Our net interest expense in the first quarter of fiscal 2024 increased to $5.5 million compared to $5 million in the first quarter of last year. The year-over-year increase is primarily due to higher borrowings on the revolving credit facility as well as higher year-over-year interest rates on our term loan during Q1. The effective tax rate for the first quarter was 23.4%, compared to 23.3% in the first quarter of last year. Net loss for the quarter on a GAAP basis was $14.7 million, or $0.30 per share, as compared to a GAAP net loss of $11.8 million, or $0.24 per share, in the first quarter last year. Adjusted net loss was $12.7 million or $0.26 per share as compared to last year's adjusted net loss of $10.1 million or $0.21 per diluted share. Our adjusted EBITDA decreased to $1.7 million in the first quarter of this year compared to $2.9 million in Q1 last year. Turning to our balance sheet, we ended the quarter with $44.1 million in cash, $216.7 million in total debt, and total liquidity, including availability on our revolving credit facilities, of $95.4 million. Our current leverage ratio is 3.8 times. We ended the quarter with consolidated inventory down 7.5% compared to the first quarter of last year. The decline reflects a concerted effort to tightly manage inventory in the current environment and is primarily the result of lower freight costs and fewer inventory units year over year. At TCS, on a unit basis, on-hand inventory was down approximately 10.8% year-over-year driven by general merchandise. Capital expenditures were $8.6 million in the first quarter of fiscal 2024 versus $8.9 million in the first quarter of fiscal 2023. As a reminder, we plan to spend $20 to $25 million of capital in fiscal 2024. We are continuing to prioritize investments in our stores and technology this year. Free cash flow used for the first quarter of fiscal 2024 was $16.7 million versus a use of $11.9 million in the first quarter of fiscal 2023. Given our current process of evaluating strategic alternatives, we are not providing financial outlook. However, I will share some qualitative commentary on our quarter-to-date trends thus far, as well as initial thoughts on how we are viewing the remainder of the fiscal year. Quarter-to-date in Q2 Our year-over-year sales decline has improved slightly from the decline we just reported for Q1. Our performance in Q2 continues to be driven by relative strength in our custom spaces business with year-over-year growth in our alpha and Preston product lines. However, our general merchandise category remains challenged, resulting in double-digit year-over-year total sales declines, though not of the magnitude reported for the first quarter of fiscal 2024. Despite freight cost pressure we are currently seeing, for the full year, we expect to benefit from lower freight costs. We also expect to continue exercising discipline in our promotional activity and with continued favorable business mix should result in stable to modestly expanding consolidated gross margins for the full year. It should be noted gross margins were more negatively impacted by promotional activity in first quarter of fiscal 2023 than any other quarters in fiscal 2023 making it the easiest compare from a gross margin rate perspective. On the SG&A front, we executed meaningful cost actions in fiscal 2023 and expect to remain extremely disciplined in our SG&A spend in fiscal 2024. Capital expenditures are expected to be approximately $20 to $25 million, primarily related to new store openings in fiscal 2024, as well as investments in technology and manufacturing infrastructures. We opened one store and relocated one store during the first quarter of fiscal 2024. Subsequent to the end of the first quarter, we opened a new store in Ashburn, Virginia, and we have plans to open two more new stores in the remainder of fiscal 2024, as well as close one store. This concludes our prepared remarks. I'll now turn it over to the operator to begin the Q&A session for questions.
spk06: Thank you very much, sir.
spk03: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star then 1 on your telephone keyboard. A confirmation tone will indicate your line is in the question queue. You may press star and then 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Again, if you would like to ask a question, please press star and then 1 now. The first question we have comes from Kate McShane of Goldman Sachs. Please go ahead.
spk05: Hi, good afternoon. Thanks for taking our questions. I wondered if I could start with asking about the reallocation of space within the store to core storage and organization. What is being changed out as a result of this change in the store?
spk02: Yeah. Hi, Kate. This is Satish. I'll take that question. You know, I'll take a step back and say, firstly, as we look to stabilize our general merchandise that benefited quite well during the pandemic, We're really looking at four distinct ways to really continue to kind of stabilize that. So first is, as you quite rightly pointed out, reallocation of certain space as it relates to our end caps. Some of the seasonal merchandise that we have had had there is now being replaced with some of our core, more tried and true collections. And we've definitely seen an increase in productivity there. But that's also additive to some of the other things that we're doing, such as promoting more of our exclusive private label business, which currently sits around 45% of our general merchandise business. And we're seeing great success with our Everything Organizer collection and is up quite a lot relative to Q1 of 23. And as a reminder that Everything Organizer collection complements our alpha solutions perfectly. And through our integrated marketing approach and in-store designers, we believe we can bundle alpha and our everything organizer collection in a more meaningful way and thereby driving a much higher attachment rate. Additionally, I would say we're also focusing on our discovery categories. And so you'll see a lot more of that in our stores as well. They continue to do incredibly well for us, in particular on-the-go travel solutions and home fragrances, and believe we have significant opportunity there. And then lastly, I would say we're looking to expand our premium core assortment, which will also make its way on some of our headers. And these include products like our vegan leather bins, lux acrylic, birch wood bins, even heavyweight canvas with more leather accents. So really excited about being able to introduce that and seeing the customer reception as we start to integrate more premium core storage and organization, general merchandise. which helps finish out our more premium custom spaces.
spk05: Okay, thank you for that. And what can we expect with regards to seasonal offering going forward? Was that historically a certain percentage of sales and it will now be a smaller percentage of mix going forward?
spk02: Yeah, our seasonal offering typically is limited to two main occasions, and that's back to college, which is what we have in our stores right now. and then our holiday assortment. And so you would likely see more of that continue in the future years as well.
spk05: Okay, thank you. And then our second question was just about the store closure you mentioned on the call. Was this store unprofitable and can we expect to see any other store closures or store closure announcements over the next few months?
spk01: Okay, it's Jeff here. know as we look at our store portfolio we're always evaluating uh you know continued operation in certain locations in this particular store opening there was a renewal that we chose not to take and decided to have a closure we have not announced any other store closures in the future at this point but we're continuously evaluating our store fleet as you know we're very proud of our store fleet that's been grown over the many years of the operation of the business and very proud of the productivity of those stores. You know, we're looking forward to fiscal 24. As we mentioned on the call, we have opened two stores already. One is a relocated store in San Francisco, the other in Springfield, Virginia, and also opened one post quarter end in Ashburn, Virginia. Both of those store openings opened with an excited customer base waiting at the door And so, you know, we still feel really good about the new store openings that we have planned for fiscal 24. Certainly, just given where we are from a business standpoint, wanting to drive store growth and awareness through the store growth, we've pulled back on openings for fiscal 25 and beyond at this point, but still see a very large white space for us to continue to expand as the business and the macroeconomics conditions change.
spk05: Okay, thank you. Our last question is just on the refinancing of the credit facility. I know you mentioned in the prepared comments that that was being worked on. Is there any indication of timing of when that can be figured out?
spk01: We have not announced any timing associated with refinancing. We just continue to work with our financial partners on that front.
spk06: Okay, thank you. Thank you. The next question we have comes from Chris Horvath of J.P.
spk03: Morgan. Please go ahead.
spk00: Hi, good afternoon. This is Jolie Wasserman on for Chris Horvath. As you mentioned, the consumer has been pretty under pressure for some time now with peer commentary suggesting this has worsened in recent months, and we're seeing a lot of retailers investing in promotions right now to drive units. I know you mentioned sequential top line improvement quarter to date, but are you seeing the consumer notably worse than you were six months ago? Are you seeing some more aggressive competitor pricing in response to all of the unfavorable macro you were talking about? And if the answer to that last part is yes, would that suggest that you would also need to keep investing in price to continue to stay competitive, especially as you're heading into back to school season?
spk02: Yeah, I'll take perhaps the first part and then let Jeff weigh in as it relates to gross margins. Look, there's no doubt our customers continue to contend with elevated interest rates, inflation, rising living costs, uncertainties in the job and housing markets. And they do impact their purchase decisions, especially as it relates to general merchandise products. We have observed strong customer engagement during promotional events. But we've also seen a noticeable retreat during non-promotional periods. That's why our promotional strategies are so carefully targeted. We found that creating a sense of urgency through time events, time-limited events, really enables us to drive sales more profitably compared to extending promotions. Having said that, let's not forget the consumer need for the container store, which still remains incredibly strong. As Americans continue to contend with the stress of clutter in their homes and the need for more space, and we are uniquely equipped to help, then we claim not only their well-being, but their spaces as well. And so that's how we are counterbalancing the current macro environment that we are living in today.
spk07: Any other follow-ups? That'll be it.
spk06: Thank you.
spk03: Thank you. Ladies and gentlemen, we have reached the end of our question and answer session, and we have reached the end of our conference. Thank you for joining us today. You may now disconnect your lines.
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