Container Store (The)

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.

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?

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.