The Container Store Group, Inc.($TCS)
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The Container Store Group, Inc.($TCS)
"The Container Store exists to transform lives through the power of organization."
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What’s inside…
Company (elevator pitch)
About TCS
Management
Competitors
Financials/Metrics
Thesis
Personal Touch
Conclusion
Disclaimer is at the end.
1. Company (elevator pitch)
The Container Store Group, Inc. (“TCS”) TCS 0.00%↑ is a turn-around story with new management and low-to-no-expectations from the market, mainly due to uncertainty/change in the macro environment and competition.
Focusing on strategic new smaller stores, leaning into customizable-home-spaces, upgraded e-commerce experience and mixing it all with large loyal customer base, TCS has potential to generate 100%+ returns… but (of course) there are risks!
2. About TCS
The Container Store is the original and leading specialty retailer of organizing solutions, custom spaces and in-home services in the United States and the only national retailer solely devoted to the category. TCS provides a collection of creative, multifunctional and customizable storage and organization solutions that are sold in stores and online.
History (Past):
Garrett Boone and Kip Tindell met while working in the paint department of Montgomery Ward. On July 1, 1978, The Container Store opened in a small, 1,600-square-foot, retail space in Dallas. Kip Tindell (Chairman and CEO), Garrett Boone (Chairman Emeritus), and architect John Mullen opened a retail store offering a mix of products devoted to helping people simplify their lives. In doing so, they originated a new category of retailing (storage and organization).
Initial capital was provided by Garrett, his father, and John Mullen, who were founding directors, officers and shareholders of the company.
In 1999, the company bought one of its main suppliers, Elfa International. Elfa designs and manufactures component-based shelving and drawer systems and made-to-measure sliding doors. Elfa was founded in 1948 and is headquartered in Malmö, Sweden. Elfa’s shelving and drawer systems are customizable for any area of the home, including closets, kitchens, offices and garages.
The first store location outside Texas opened in Atlanta, Georgia in April 1991.
In 2007, The Container Store, Inc. was sold to The Container Store Group, Inc., (a holding company) of which a majority stake was purchased by Leonard Green and Partners, L.P. (“LGP”), with the remainder held by certain employees of The Container Store, Inc.
On November 6, 2013, the Company completed its IPO.
Present:
Today, The Container Store Group operations consist of two reportable segments:
The Container Store (In US) and Elfa International AB (outside of US)
The Container Store (“TCS”) which consists of retail stores, website and call center, as well as it’s in-home services business.
As of May 2023, TCS operates 97 stores with an average size of approximately 24,000 square feet (18,000 selling square feet):
Stores receive all of the products directly from one of two distribution centers. First distribution center in Coppell, Texas, is co-located with corporate HQ and call center, and their second distribution center is located in Aberdeen, Maryland.
Stores are typically organized into 14 distinct lifestyle departments.
The types of products sold in each department are as follows:
In 2021, the Company acquired Closet Parent Company, Inc. (“Closet Works”) for $21.5 million which expanded TCS’s manufacturing capabilities to include wood-based spaces and enhanced it’s premium wood-based product offering.
Additionally, The Container Store’s “Custom Spaces” currently consist of elfa® Classic, elfa® Décor, Avera® and PrestonTM systems (with acquisition from CPC), which are wholly-owned and manufactured by TCS.
Video below will give you an idea of what to expect when you visit TCS’s store:
In fiscal 2022, TCS had net sales of $991.4 million, which represented approximately 95% of total consolidated net sales.
Elfa International AB (“Elfa”) operates three manufacturing facilities with two located in Sweden and one in Poland. Today TCS segment is the exclusive distributor of elfa® products in the U.S. and represented approximately 56% of Elfa’s total sales in 2022.
Elfa sells its products on a wholesale basis to various retailers in approximately 30 countries around the world, with a concentration in the Nordic region of Europe.
In fiscal 2022, the Elfa had $55.9 million of third-party net sales, which represented approximately 5% of total consolidated net sales.
3. Management
Satish Malhotra - CEO
A seasoned retail executive with decades of diverse and valuable experience, Satish Malhotra joined The Container Store on February 1, 2021 as Chief Executive Officer and President.
Before TCS, Satish Malhotra worked at (various roles, including CRO and COO) Sephora for 21 years where Satish was responsible for leading Sephora’s retail growth by expanding its in-store services (growing SiJCP to over 600 shores) and experiences, developing digitally enabled solutions and by growing its off-mall store locations. Before joining Sephora, Satish was a Transaction Services Senior Associate at PwC. Satish Malhotra is a Certified Public Accountant (inactive).
Jeff Miller - CFO
Jeff Miller has been with The Container Store since August 2013 and has served as TCS’s Chief Financial Officer since August 2020.
Melissa Collins - CMO
Melissa Collins has been with The Container Store for 22 years and has served as TCS’s Chief Marketing Officer since July 2016.
Dhriti Saha - COO
Dhriti Saha is The Container Store’s Chief Operating Officer overseeing technology, information security, product management, retail operations and logistics. He joined The Container Store as Executive Vice President and Chief Information Officer in May 2021.
Stacey Shively - CMeO
Stacey Shively joined The Container Store in November 2022 as Chief Merchandising Officer. She leads a diverse merchandising team and plays a key role in strategic initiatives including the company’s growing private label products, sustainability and expansion of Custom Spaces.
Notable Board Members:
Kristofer Galashan and Jonathan Sokoloff, both are partners at Leonard Green & Partners, L.P. LG&P owns about 30% of the outstanding shares.
4. Competitors
For TCS, competition is everywhere.
From know titans like Amazon, Walmart, and brands like Target & TJX to likes of IKEA and local furniture stores that do custom (custom fitted) furniture pieces.
5. Financials/Metrics
As of June 2nd, The Container Store’s Market Cap is about $134,000,000.
This is either a deep value or a value trap… time will tell…
Total Revenue is about $1 billion, due to unexpected (one time) $197.7 million non-cash goodwill impairment charge all metrics are getting “distorted”.
What really matter to me:
Average ROIC is almost 7% (I like to see 15%+)
Average ROE is around 13% (I like to see 15%+)
Gross Margins are around 57% (I like to see 50%+)
Average Free Cash Flow Yield is around 9% (I like to see 5%+)
Shares Outstanding have been increasing (by little bit) every year (I like to see the total opposite of that)
Management has stated that the goal is to get company to $2 billion in annual sales with potential to add 76 new stores.
Mr Market does not believe it…
6. Thesis
Bullish Cases
Brand
Instagram - 1.4 Million followers
Facebook - over 500,000 follows and likes
Pinterest - almost 500,000 followers
TikTok - almost 100,000 followers
Twitter - almost 50,000 followers
When you search around popular social medias for “The Container Store” or anything like that you can find 100s (maybe even into 1000s) of posts and videos of people raving about Container Store and how much they love shopping there.
Here is one example:
Here is another example:
You can also find many YouTube/TikTok videos of people going and shopping in the stores (free advancement) with that said some of the influencers did get some kind of monetary benefit from doing the videos but a there are many videos that are done by “regular people” for fun.
Customers that shop at TCS love it and are willing to pay the “extra” price (which can be confirmed by gross margins) for quality and convenience in the item selection.
Loyalty Program
Old Loyalty Program called POP! had a bit over 10 million members which were converted with debut of the new program called “Organized Insider” which added another 900,000 new members during Fiscal 2022.
(Side Note: To become a member all you have to do is provide your email)
Totaling around 11 million members or emails … some will obviously will not be “useful” … yet having that database is very helpful!
With that said, there are perks to being a member.
Expansion
Regular Stores
Size Reduction
Store-in-Store likes of Home Depot and Lowe’s
Drop shipping / pick ups?
Regular Stores
Management believes TCS can grow to over 170+ stores over time. TBD.
Size Reduction
All of the new stores will be smaller and will be more conscious on how the space is being used for full potential + to maximize profits.
Store-in-Store
Similar to what Satish Malhotra did with Sephora’s stores, I can see TCS doing same with Home Depot or Lowe’s or another big company that has alignment with TCS’s concept particularly Custom Spaces.
Drop shipping / pick ups?
Potentially doing drop shipping or pick ups to extend the reach with the limited customers to provide better experience with online orders via partnering with likes of UPS, FedEx, etc. or another popular store chain something like Amazon did with Kohl’s.
Online Store + App
Just months after launching app, it has achieved a 4.8 rating in the Apple App Store and currently ranks in the top 200 shopping apps.
App had over 450,000 first-time downloads of the app, as customers responded to app-only offers, the Organized Insider Dashboard and new app features like Drawer Organizer tool, which helps users with their drawer organization projects.
Credit Card + Custom Closets with Up Selling (a)
The Container Store offers credit card, when making a purchase of $3,000+ and paying it off within 24 months there is no interest charge, so you can build a Custom Closet and put it on “credit” and pay it off in 24 months… As a user (purchaser) of Custom Closets from TCS (so I’m biased), that is what I’m currently doing (payments are around $250 a month on the closet for my two kids and my girls are already enjoying their custom space and I can change things up as they grow!)
The whole experience was easy and designer was very helpful/patient with wifey & me (in person and via email communication) and installation was done on the day that worked for us with-in two weeks of making a purchase.
As kids will grow and shelves will need to be adjusted or changed (fully customizable to fit the needs and wants of users), we will be buying more from TCS to custom fit everything to fit the needs of our girls as they grow.
Video below goes over some of the “customization” that you can do to personalize custom closets and how they can be “changed around” later on + it looks somewhat similar to what we have
You can also use TCS’s credit card for other small / medium purchases with no interest payments if they are paid off in either 6 months or 12 months, but I guess you can do so with other credit cards too.
VR + Self-Picking Custom Closets (b)
When TCS will be about roll out ability to use VR to “see” how custom closets will look like in your home + ability to fill out all of the paperwork online without showing up to the store and only discussing everything via chat/call/email with designers, this should really help with expansion and sales at much lower costs.
I believe its doable as its not that hard (for customers) to get measurements of closets (or any other small ish spaces) or garages + VR would help with visuals and Installer from TCS can adjust everything on the spot when installer would come to install everything.
Signing paperwork via emails is becoming (already is?) a norm.
Low Expectations / Reversal to the mean / It’s too cheap!
Given current environment and “macro”, TCS 0.00%↑ has low to no expectations to preform well and any future “beats” or “positive surprises” can help drive price higher aka reversal to the mean.
Regarding “its too cheap” … I understand… cheap things can get a lot cheaper.
Creativity+
With announcement of Bed, Bath, and Beyond bankruptcy, TCS didn’t drop a beat and announced that The Container Store will give customers a 20% discount off any single item if they bring a Bed Bath & Beyond coupon to any of TCS’s stores.
Although realistically TCS keeps blasting me with 20% sale/coupons emails which means 20% discount is more of a marketing move, but a nicely timed move non-the-less.
Another “creative move” by TCS.
Partnering up with thredUP.
Refresh your closet and someone’s wardrobe while earning an eGift Card from The Container Store! We’ve partnered with thredUP to help you send the clothes you don’t wear to someone who will, keeping it out of landfills.
Also partnering up with YouTuber Star like Rosanna Pansino who has 14 million subscribers and over 3 billion views.
Lastly, The Container Store Group, Expands Its College Offering
TCS has a tab on their website called College Shop, everything curate to college students (and their parents) + partnering up with Dormify in select stores, all can and will drive higher sales.
It shows that The Container Store can quickly act on its feet and adjust to try and take market share or alternative ways for more sales.
PE Takeover
Although not as likely (I think) there is still a possibility of TCS getting taken private (if they keep on executing and Mr Market not rewarding the progress via higher share prices).
Using FCF for buy backs
This one is easy and simple, if Mr Market will not be rewarding TCS 0.00%↑ for their good execution, management can use FCF to buy back shares.
Bearish Concerns & Kill Switches
Inflation/Recession
The easiest and most obvious bearish concern is Inflation and Recession, and obviously if we to have harsh recession + inflation that will go higher (or stays high for too long), both would negatively impact TCS.
Less Revenue + Debt = No Bueno
With that said if you believe that we are already in Recession and Inflation has already peeked (does not mean it will go down by a lot or at all), TCS should be able to survive and come out okay (ish) at the end.
High rates will make it much harder (if needed) for TCS to borrow.
Competition / IKEA
Recently it was announced that IKEA is planning to open 8 new stores in United States (no locations have been disclosed yet). If IKEA was to open stores in the area where The Container Stores are located, it could (potentially) kill or strongly harm TCS’s profits / expansion plans.
Satish Malhotra’s Departure
Big chunk of the thesis is build on that Mr Malhotra can turn this company around, if he was to leave (or something to happen to him) it would probably be best to sell out and move on.
Valuation
If valuations would get out of control (to the upper), it will be time to sell.
99.9% this is not a #neversell.
Not Customer Friendly Returns
Although TCS gives you 120 days to return anything you want (no questions asked), the catch is 1) you have to do it in person or 2) ship it back at your own expense which makes it really a “turn off” to do so as some of the items are just not worth to be returned via mail (for price reasons).
Because I live in Brooklyn (the closest TCS store is in Staten Island + there is one in Manhattan but I’m not fan of going to the city) paying tolls + wasting time = not worth the hassle, so non TCS items are easier to buy via Amazon.
(I have read up on similar complains from other customers, so I’m not the only one)
With that said, if TCS was to open in Brooklyn I would definitely go there more often!
Another Unexpected Charge
I would really be concerned if management came out with another “one time” non-cash goodwill impairment charge or anything similar to that in the next following earnings.
High Debt Levels
Quick glance at liabilities via any financial website (and not 10K) and you see around $500M+ of debt, but when looking at the actual balance sheet/liabilities, you can see that the actual long term debt is at $163M and not due for couple of years and the operating leases that are around $500M are broken down due around $100M(ish) yearly. Everything else is “spare change”.
Company is at “comfortable” Debt Levels.
7. Personal Touch
Does This Company Meets The Check List Requirements?
No.
Is this WONDERFUL , GOOD, OKAY, OR BAD Business?
This is OKAY Business.
Guru Holdings?
Currently none of the gurus that I follow own any significant amount of TCS 0.00%↑ shares.
Margin of Safety Price?
Margin of Safety is ranging from about $3 to $4.
Fair Value? Price Target?
Based on my model, Fair Value is around $8.
Holding Period?
Approximately*** one to three years.
***This is a turn-around-play, as long as company is executing and expanding its a hold, any large deviation from the main mission and its a sell. Yet reach of $8+ should be trimming or selling out.
8. Conclusion
This is a very simple turn-around-play and so I tried to keep it simple and short.
As long as things do not get worse (on the macro levels) and company will keep on executing on their promises (even if it will take a bit more time) + revenue will be increasing, I can see TCS going to $8-$10 range (can do buy backs for a boost) on surprise beats or PE taking it private (that is, if management will allow it to happen).
Holdings Disclosure
At the time of this publication, I do own shares of TCS 0.00%↑ .
Disclaimer
The information in this article is provided for informational and educational purposes only.
The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.
None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.