The Container Store $TCS Q3 2020 Earnings Recap

How was The Container Store’s Q3 2020 Earnings?

The Container Store ($TCS) announced their Q3 2020 earnings results yesterday and they absolutely crushed it.

Net Sales: $275.5 M (up 20.5% YoY)
Online Sales: Up 98.1% (vs. 86.4% last quarter)
Adjusted EBITDA: $42.4 M (up 98.9% YoY)
Net Income: $19.7 M (vs. $2.4 M last year)
GAAP EPS: $0.40 (vs. $0.05 last year)
TTM EPS: $0.72 (an increase from $0.37 last quarter)
Operating Cash Flow: $25.5 M (vs. -6.9 M last year)
Long-Term Debt: $191.1 M (vs. $305.7 M last year)

Melissa Reiff, the former CEO announced that she would be retiring last December and that she would be succeeded by Satish Malhotra effective February 1, 2021. I would say that she is leaving the company in a good place for Satish to take over. Satish is a former executive of Sephora with 20+ years of experience and he seems to have a good operations background that should help The Container Store continue the momentum it built since last quarter.

Given that I invest in tech companies generally, a 20.5% YoY increase in sales is generally nothing to write home about, but I think it’s incredibly impressive for this particular company because it is by far the highest net sales increase this company has seen in 15 quarters (that’s as far back as I looked). What’s even more impressive is if you look at the table below, there isn’t a single quarter that has net sales growing even remotely close to the 20%+ we saw in this quarter.

Q4’s highlighted cell is the midpoint of their guidance

Being able to grow sales at this rate enables The Container Store to have operating leverage which will enable them to grow their EPS rapidly which is what we’ve seen them do in the past quarter. Their EPS of $0.40 in Q3 alone is more than the total annualized EPS they generated in FY 17 and 19. In fact, their current TTM EPS of $0.72 is by far the highest they’ve had in the past few years and their guidance of EPS of $0.98 to $1.03 is incredibly bullish since I feel they generally guide pretty conservatively given some mishaps in previous years.

Q4’s highlighted cell is the midpoint of their guidance

The Container Store’s operating cash flow and free cash flow continue to grow and I expect Q4 should have very strong operating cash flow growth which hopefully they use to pay down debt. I think at the rate they’re going, they can be done with the majority of their long-term debt by the end of FY 2021.

I reviewed their earnings call transcript for Q3 and listened to some of the webcast and it seems that Melissa (chairwoman and former CEO) was incredibly upbeat about their performance:

Melissa Reiff:
In Q3, our POP! enrollments increased by 26% compared to the same time period last year, representing a gain of over 370,000 new POP! stars during that time. In fact, in Q3, we recorded our highest POP! enrollments since 2005, and we have continued to see the program grow into Q4.

POP is their loyalty rewards program

Melissa Reiff:
We are thrilled to have recently launched our new co-branded product collection with Marie Kondo. The collection, which features more than 100 sustainably sourced products launched online January 11 and in stores January 15. While still very early, customer response has been terrific

Melissa Reiff:
But I can tell you that we are in great shape in terms of inventory for our Elfa sale, which began the middle of December, December 18 and goes through February 23. And we’re in very good shape there. And all the other product categories, like every other retailer, we’ve been chasing this inventory across the board, but you can look at the results, and our team has done an excellent job with that.

Some key points from the transcript:

  1. Huge increase in POP signups, their loyalty rewards program, at 370k vs. 293k last year
  2. Their Elfa sale is going really well, which was reiterated a few times during the conference call
  3. They are not renewing the lease of their Lexington Avenue store due to the unprofitability and costs of that location and they are moving some of their employees to their Chelsea store location.
  4. They are opening a Richmond store at the end of FY ’20 (next quarter)
  5. They are planning on opening another store in 2021 and are TBD on other capital expenditures since Satish is two days into the job
  6. Gross margin was negatively impacted by higher freight costs
  7. The analysts asked a lot of questions about freight and the surcharge in shipping costs that third parties were implementing since it had an impact on gross margin and it seems that the surcharges are here to stay for a little bit.
  8. Gross margin for Q4 is being guided to be slightly down to flat due to the increased freight & shipping costs. I’m forecasting 58% vs. 59% last year.

Wrapping up

I was incredibly impressed with The Container Store’s earnings and I decided to buy more shares after hours at an average cost basis of $14.30. I firmly believe that the company has really benefited and continues to benefit from Netflix’s hit show, Get Organized with the Home Edit and their new partnership with Marie Kondo should only help fuel demand and interest in the coming quarters.

The closing share price of $14.81 represents a 14.72 forward P/E ratio which is definitely on the low end for a company that’s now projecting 20%+ growth. While it’s hard to say how the market will react when it opens today, I would find it shocking if the stock didn’t trade up given how great the results were, the strong guidance, and the low valuation, but stranger things have happened, especially this week.

Next quarter, I’ll continue to monitor their net sales growth levels, how they utilize their cash flow and if they keep chipping away at their debt levels. Also, it will be Satish’s first quarter as CEO, so it will be interesting to see what priorities he will establish for the company. To be frank, this isn’t a company that I’m married to and it will have a short leash since it’s more of a value play than anything but I’m pretty happy so far with my initial investment results.

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