The Container Store Group, Inc. (TCS) Earnings Call Transcript & Summary

Good day and welcome to The Container Store 2020 Annual Meeting of Stockholders. I would now like to turn the conference over to Melissa Reiff, Chairwoman of the Board and Chief Executive Officer. Please go ahead.

Good morning, everyone, and welcome to The Container Store's Annual Shareholder Meeting. Thank you for joining us today. As Brent said, I'm Melissa Reiff, Chairwoman of the Board of Directors and Chief Executive Officer, and I will be acting as Chairwoman of this meeting. I'd also like to extend a warm welcome to our shareholders and also acknowledge the other members of our Board of Directors who are joining us today: Tim Flynn, Kris Galashan, Bob Jordan, Walter Robb, Raj Sisodia, Jon Sokoloff, Caryl Stern and Wendi Sturgis. In addition, we have a few members of The Container Store's management team with us: Jodi Taylor, Chief Financial and Administrative Officer and Secretary; Anders Rothstein, Chief Executive Officer of Elfa, joining us from Sweden. Also joining is Albert Garza from Ernst & Young LLP, The Container Store's independent auditor. During the Q&A period, Albert will be available to answer appropriate questions via the Ask a Question text box found on the annual meeting web portal. Trish Hodson is participating on behalf of Broadridge. She is acting as our inspector of election for today's meeting. Trish has signed the customary oath. I'll now turn the meeting over to Jodi, who is acting as Secretary, and she will review some formalities.

Thanks, Melissa, and good morning, everyone. The meeting will now officially come to order. We will begin today's meeting with a discussion of the proposals described in our proxy statement, followed by a brief management presentation, and we will conclude with Q&A. As a reminder, our remarks in the management presentation and responses to questions today may include forward-looking statements. Forward-looking statements involve risks and uncertainties, which are described in our SEC filing, including our fiscal 2019 annual report on Form 10-K, and our actual results may differ materially. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today, and we don't have any obligation to update them. Also during the management presentation and Q&A portion of the meeting, we may reference certain non-GAAP financial measures that we believe provide useful information for our investors, including adjusted net loss per share and adjusted EBITDA. A reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures is available in the company's earnings releases for the first quarter of fiscal 2020 and annual report on Form 10-K for the fiscal year 2019, which are posted on the company's website at www.containerstore.com. The polls open today, August 26, at 10:30 a.m. Central Time for voting on all matters before the meeting. You can vote online through the annual meeting web portal any time until I announce that the polls are closed. I've received affirmation that notice of this meeting was properly given to shareholders of record as of July 2, 2020. The inspector of elections has a complete list of the holders of record on July 2, 2020. And for shareholders who have entered a valid 16-digit control number, the shareholder list is available during this meeting at the bottom panel of your screen. I've also been informed by Broadridge that a quorum is present and that this meeting is duly convened and can proceed. The agenda and rules of conduct for the meeting are also posted on the annual meeting web portal at the bottom of your screen. We ask that you follow these rules to help this meeting run smoothly. We will address appropriate questions during the Q&A portion of the meeting. [Operator Instructions.] Direct all the questions to Melissa Reiff. Only shareholders of record as of the close of business on July 2, 2020, and their proxy holders may submit questions or comments. [Operator Instructions] We may group questions by topic with a representative question read aloud and answered. And questions may be deemed out of order if they are, among other things, irrelevant to our business, repetition of statements already made or in furtherance of your own personal, political or business interest. And with that, I'll turn it back to Melissa.

We'll now move to the proposals. The first item of business today is the election of directors. The Board of Directors recommends that shareholders vote for the election of Robert E. Jordan, Jonathan D. Sokoloff and Caryl Stern as Class I Directors to serve until the 2023 Annual Meeting of Shareholders and until their respective successors shall have been duly elected and qualified. The second item of business is the ratification of the appointment of Ernst & Young LLP as The Container Store's independent registered public accounting firm for the fiscal year ending April 3, 2021. The Board recommends that the shareholders vote for the ratification. The third item of business is the approval on an advisory nonbinding basis of the compensation of our named executive officers. The Board recommends that the shareholders vote for the compensation of our named executive officers. If you have already voted, there's no need to vote now, unless you would like to change your vote. If you have not voted and you'd like to, please click the Vote Here button at the bottom right-hand corner of your screen. You will need the control number that you use -- that you used to join the meeting. We'll now pause for a moment to give anyone who hasn't yet voted a chance to vote. The polls will remain open for another 30 seconds. [Voting]

The time is now 10:35 a.m. Central Time on August 26, 2020, and the polls are now closed for voting. Our preliminary results indicate that Robert E. Jordan, Jonathan D. Sokoloff and Caryl Stern have been elected to the Board. The ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending April 3, 2021, had been approved. And the compensation of our named executive officers have been approved on an advisory nonbinding basis. We'll report the final vote results that are certified by our inspector of elections in the filing with the SEC within 4 business days. Thank you, everyone. This meeting is now adjourned. I'd like now to share an update on our business. I really appreciate all of you taking the time to join us this morning as we reflect back on our fiscal year 2019, which ended March 28, 2020. And most importantly, I hope to find everyone well and safe during these times. Before I begin, I want to thank Walter Robb for his innumerable contributions to our Board of Directors and our company. As we announced earlier this morning, Walter will be leaving our Board of Directors after December 31 of this year. Walter has been a Board member since we went public in 2013, and his deep retail expertise had been extremely helpful to our business over the years. We will miss him, but of course, wish him the very best in his future endeavors. We won't initially be filling his Board seat but when we do so, our intent will be to provide more diversity on our Board. The pandemic has certainly created challenges. However, I am very proud of our company and extend my deepest gratitude to every employee at our company for their ability to adapt, adjust and work smarter than ever before. It is this ability, along with their agility, positive attitude and execution during this challenging and rapidly changing environment, that continues to drive this forward. I truly believe that out of this pandemic, The Container Store will be an even stronger, better company and poised to fully capitalize on our many differentiators and market opportunities. Fiscal 2019 for The Container Store was well on its way to exceeding our expectations on many fronts, when COVID-19 began significantly disrupting our operations in March, the final month of our fiscal year, and the considerable progress we were experiencing across our business. Despite having up to 51 of our 93 stores closed toward the end of March, we still ended the fiscal year with some solid financial highlights. During fiscal 2019, we delivered consolidated net sales of $916 million, an increase of 2.3% and a comparable store sales increase of 2.9% compared to fiscal 2018. Custom Closets, our #1 strategic focus, delivered a comparable sales -- comparable store sales contribution of 3.5% during fiscal '19. Adjusted earnings per share for fiscal 2019 was $0.30, down from $0.42 in fiscal 2018, the decline attributable to COVID-19 impacts. I want to highlight the swift actions we took to protect our company as the unprecedented impact of the pandemic became evident. In a very short time, we implemented broad actions designed to preserve the liquidity of our business during this highly uncertain time when all of our stores were closed. While these actions were difficult and very impactful to our employees, they have allowed us to preserve a large portion of our sales and cash. We furloughed many employees, mostly in our stores; temporarily reduced the base salaries of executives and certain other employees; temporarily deferred fiscal 2019 executive bonuses; waived quarterly Board fees for our nonemployee directors; and reduced merchandise purchasing and lowered inventory levels. In addition, to protect liquidity, we significantly reduced our CapEx and discretionary spend as well as drew down an additional $50 million of available funds from our revolving and credit facility, which subsequently we paid back in early Q2 fiscal 2020. Since the inception of the pandemic, our top priority has been the health and safety of our employees and customers. We quickly pivoted from a predominantly brick-and-mortar sales-driven retailer to a website sales-driven retailer overnight. Our distribution center teams were truly heroic in their efforts to fulfill our customers' orders as online sales nearly tripled in Q1 of fiscal 2020 compared to Q1 of the prior year. We had perfected our curbside pickup model years before this pandemic, and we're immediately able to refine that and make it contactless so we could leverage our capabilities. Our teams were as nimble as ever. For example, launching a new virtual in-home design service in April that has been well received and is driving Custom Closets sales. Ultimately, our website-generated sales represented 67.5% of TCS net sales in Q1 of fiscal 2020 compared to only 16.3% in Q1 of last year. Now that we have our stores back open, albeit still with limited customers and strict health and safety protocols in place, we've seen our website-generated sales subside as sales shipped back to our brick-and-mortar stores. More specific to our first quarter of fiscal 2020, we recently reported that despite the significant impact to our stores and related closings, we were able to preserve over 72% of our prior year Q1 sales. Due to the significant growth in our online sales, up 192% in the first quarter of fiscal 2020 compared to the same time period last year, we experienced higher shipping costs, which were primarily the driver of our 560 bps gross margin decline in the first quarter of fiscal 2020 when compared again to the same period last year. As mentioned above or mentioned before, the swift execution of the action plans in response to COVID-19 resulted in SG&A decreasing 20.9% to $86.3 million. Despite this reduction, SG&A as a percent of sales increased 490 bps due to the deleverage of occupancy and other fixed costs associated with lower sales. Adjusted EPS came in at a loss of $0.32 compared to a loss of $0.08 in the first quarter of last year. Adjusted EBITDA was $4.5 million for the first quarter of fiscal 2020, down from $10.6 million for the same period last year, driven by the higher net loss in the first quarter, partially offset by a decrease in cash lease expense due to renegotiated lease terms with certain landlords that resulted in deferral of $11.9 million of certain cash lease payments. Our top strategic priority continues to be to own custom closets. We've sold custom closets for 42 years and continue to see an incredible opportunity to grow our share of the approximately $6 billion market opportunity in custom closets. As a direct result of this strategic focus, we launched Avera in fiscal 2019, our newest product line of custom closets made by Elfa. We've owned Elfa since 1999, and it is not only our highest sales volume product representing 28% of our fiscal 2019 sales, it's also our highest gross margin product. Our lineup of The Container Store Custom Closets that we sell exclusively includes Elfa Classic, Elfa Décor, Avera and Laren, the most comprehensive collection of customizable closets available in the market today, along with the broad assortment of completion products. We are committed to providing the complete solution for our customers, which includes the many additional complementary products to make their solutions truly complete. As always, we continue to focus on making improvements across all areas of our business, including merchandising, new product development, marketing, executing operationally with excellence in our stores and online and making appropriate and necessary technology investments. We are making decisions quickly, thoughtfully and strategically to ensure we are keeping our brand fresh and relevant for our broad base of customers. Always remaining focused on our vision and purpose, we are motivated and energized by the changes we have made and are encouraged by our progress. As I said, we are very pleased with our response to the COVID-19 crisis and truly believe we will be an even stronger and better company as we continue to navigate our new normal. We look forward to the remainder of fiscal 2020 and are 100% committed to our success for all stakeholders. We'll now begin the Q&A portion of the meeting. I'll turn this over to the operator.

Melissa, there are no questions.

[Operator Instructions]