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The Container Store: TCS Stock Is No Bargain

Should investors blame the weather -- or poor management?

Since enjoying a successful IPO in 2013 and seeing its shares pop from $18 to $35 on the first day of trading, shares of Container Store Group Inc (NYSE:TCS) have essentially gone straight down.

The Container Store: TCS Stock Is No BargainAnd the free fall is continuing in a big way. TCS stock is down more than 15% today after a disappointing earnings report sent investors scrambling for cover.

TCS announced fourth-quarter earnings and full year 2014 results after the markets closed Monday. Net income for the quarter fell 29% to $13 million, or 27 cents per share, missing analysts’ expectations of 31 cents. Revenue was $224.3 million, a 3% increase from the $216.8 million posted in the same quarter a year ago, but was also short of Wall Street’s expectations of $232.5 million.

To make matters worse, comparable same-store sales dropped 1.4% during the quarter.

For the full fiscal year TCS posted revenue of $781.9 million and earnings of $22.7 million, or 47 cents per share. Fiscal 2014 revenue increased 4.5% from the $748.5 million reported in 2013.

TCS lowered its 2015 forecast to a range of $800 million to $815 million in sales and 30 cents to 38 cents per share in profit — much lower than the $870 million in revenue and 56 cents in profit that the Street was predicting for 2015.

The Container Store Blames the Weather

Chairman and CEO Kip Tindell said poor weather was a contributing factor in the weak performance during the quarter.

“We experienced winter storms in February during the vitally important last four days of our 50-day annual elfa sale and during the last week of our 19-day sales extension. Approximately 20% of out elfa sale sales occur during those last four days and approximately 60% of the sales extension sales occur in the final week.”

While the 20% and 60% sales figures are big numbers to miss out on because of weather, blaming the weather is a terrible excuse. First off, the Container Store sells an item that doesn’t carry an expiration date. Unlike other industries — food and beverage in particular — if a customer can’t purchase organization containers today because of the weather, they will still need the product tomorrow.

TCS operates in a push-forward industry where if there is a need for a product the purchase can be pushed forward. Restaurants, on the other hand, don’t have that luxury. Lost sales for restaurants due to bad weather really mean lost sales.

Regardless of what company I am looking at, when I see poor excuses for missing results, I immediately think “poor management,” and I believe that may be the case with TCS.

TCS Trying to Boost Sales

In an attempt to boost sales and expand its business last November, TCS started TCS Closets, which sells and builds exclusive custom built-in closest solutions. TCS Closets has seven locations in the Dallas/Fort Worth area and the early results are good — in its earnings statement, The Container Store boasted TCS Closets had an average ticket of more than $10,000.

The Container Store also recently added what it is calling “Contained Home” in 34 of its 70 national locations, pairing experienced home organizers with customers to help design their organization needs. This program has produced an average ticket price of more than $2,000. TCS has said both programs are gaining traction.

While these attempts to increase sales for TCS seem to be good, does it make sense for investors to buy stock in a company trading at 30 times earnings that is focused on selling a niche product to an even smaller niche market?

Yes, all Americans need some storage, but how many can afford to spend $10,000 on a new closest? Or even $2,000 having someone help design their storage spaces around their home?

The Container Store is selling a luxury item to a small group of the American population. With too many things can go wrong and cause this business to falter and limited upside potential, I can’t see why any logical investor would ever want to buy TCS stock.

As of this writing, Matt Thalman did not hold a position in any of the aforementioned securities. Follow him on Twitter at @mthalman5513.

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