Despite Container Store Group’s (TCS) promising plans for a high-end custom closet program, the company’s disappointing second-quarter earnings and weak sales show that TCS stock isn’t worth buying just yet.
The Container Store, which solely sells storage and organizational products, believes its new efforts toward providing custom closets will significantly up the company’s ticket price and supporting sales, but TCS stock with its non-competitive valuation is still no bargain yet.
This is a retailer that banks on a specialty of selling particular products — organizational boxes, shelving and dividers — that you can really get anywhere.
It’s becoming exponentially more difficult to ask a consumer to make a special trip to a location when they can get the same products in a trip to Walmart (WMT) or Target (TGT), or on Amazon (AMZN) without even leaving the house.
And Container Store’s price-to-earnings ratio of 30 appears expensive against peers like Pier 1 Imports (PIR), with a 10.8 valuation, Bed Bath & Beyond (BBBY) with 11.5, and Williams-Sonoma (WSM) with 23.7. While those competitors don’t focus as aggressively on the business of organization, TCS stock is still clearly expensive.
TCS Earnings Weren’t Encouraging
The Container Store reported a modest second-quarter earnings of 6 cents per share late Monday — down from 11 cents per share last year and a penny short of the analyst mark of 7 cents per share. Revenue also proved a disappointment, with second-quarter sales of $195.5 million, up 1.2% from last year but also short of the analyst consensus view of $197.6 million.
The Container Store blamed a stronger U.S. dollar and and increased spending for the earnings fall.
Container Store stock plunged more than 15% early in Tuesday’s session, close to its 52-week low. TCS stock is down more than 30% since the start of the year … but, again, even at these lower prices, the Container Store still isn’t a good deal.
To be fair, the Container Store is moving in the right direction.
The Container Store, which sells customizable shelving and drawer systems through its Elfa business unit based in Sweden, is in the midst of rolling out its new high-end closet business, called TCS Closets line, and says those plans are on track.
“The benefit from TCS Closets to our comparable store sales more than doubled from the first quarter to second quarter of fiscal 2015,” said Kip Tindell, Chairman and Chief Executive Officer, in a statement. TCS Closets averages a $10,000 ticket price versus the store’s day-to-day average ticket price of $60.
The Container Store’s general competitors like Bed Bath & Beyond don’t offer the same custom closet business that the Container Store is now more heavily banking on. This is a business with increasing demand and large sale prices. It looks like a promising market, where private companies like Berkeley-based California Closets, formerly a Williams-Sonoma company, are now dominating.
Aside from high-end closets, The Container Store is also getting into the payments game. It announced last week that it will offer private-label credit cards to its customers this spring through Synchrony Financial.
For fiscal 2015, The Container Store’s expectations are generally in line with the Street view. The company expects revenue of $800 million to $815 million, and it narrowed its same-store sales guidance to a range of -1% to 0% — upping the lower end by one percentage point. Expected earnings are 30 cents to 38 cents — consistent with the Street’s expectations for 34 cents per share.
The Container Store is also forging ahead with plans to open 10 new stores this year, increasing its square footage growth by 12%.
The Bottom Line: But still, despite its potential to foster a competitive high-end closet business and ramp up loyal customers with its upcoming credit card program, Container Store stock is still way too expensive and earnings are too weak for TCS to be a good buy.
