The Container Store (NYSE:TCS), which is the pioneer of storage and organization products, went public in November 2013. And it turned out to be a red-hot offering. On the debut, the TCS stock doubled to $36. The company looked more like a tech startup – not a traditional retailer.
Then again, at the time TCS was growing at a fast clip. Consider that it had reported 13 consecutive increase in comparable store sales. It certainly helped that the company had loyal fans like Oprah Winfrey and Ellen DeGeneres.
But the good times would soon fizzle. Fast forward to today: TCS stock is now trading at a lowly $6.50.
So what now? Can TCS stock regain its former glory? Or should investors be cautious? To see, let’s take a look at the pros and cons:
Container Store Stock Pros
Restructuring: TCS is in the midst of making major changes to the organization. One of the main strategic initiatives is to put much more focus on Custom Closets, which have shown lots of traction with customers. Expect TCS to invest more marketing dollars in the category and add more items. What’s more, TCS plans to focus more on private label offerings. This should help boost margins and differentiate itself from the competition.
Next, the company is experimenting with new store formats, better layouts of the merchandise and value-based pricing. So far, there have been encouraging results from the Dallas flagship store.
Oh, and TCS has revamped its marketing message. The new tag line: “”Where Space Comes From.”
According to TCS vice president of marketing Felipe Avila: “This campaign is designed to speak to consumers going through different life stages – whether that’s buying a new home, growing their families or downsizing. We want to connect with them through stories they can relate to and identify with.”
Buzz: A hit show can move the needle for an industry. And this perhaps could be the situation with TCS. Nettflix (NASDAQ:NFLX) has a show called Tidying Up with Marie Kondo.
In case you do not now who she is, Kondo is one of the world’s foremost experts in dealing with clutter. Note that she is the author of the best seller, “The Life-Changing Magic of Tidying Up.”
No doubt, this is spot on for TCS. Actually, based on Twitter (NYSE:TWTR) posts, the show may be leading to jumps in store visits.
Valuation: The Container Store Stock has definitely gotten more affordable. Since August, the shares have lost more than 40% of their value, with the market cap at only $320 million (this is despite a 37% increase this year!)
Now the forward price-to-earnings ratio at a reasonable 14X. Container Store Stock also trades at a mere 0.37 times sales.
Container Store Stock Cons
Execution: The execution of TCS’s management has been wanting. Just look at the fiscal third quarter. Despite the overall demand from the holiday spending season, the company had a terrible performance. As a result, TCS stock plunged.
In the quarter, revenues dropped by 0.6% to $221.6 million and comparable sales were off by 0.8%. In fact, the holiday departments posted a grueling 15.8% drop on the top-line.
Profits were also light. Earnings per share came to 7 cents a share, down from 11 cents in the same period a year ago.
Niche: Even though TCS has been around since 1978, the company is still relatively small. It currently operates 92 stores. To put things into perspective, Home Depot (NYSE:HD) has 2,200 locations.
In other words, TCS may ultimately be in a niche industry – which means that growth is limited. If anything, the company may have already reached the peak position. During the past five years, revenue growth has averaged 3.9%.
And there are few signs that things will perk up any time soon.
Competition: Nowadays consumers have more options to purchase TCS-style products. Some of the large rivals in the space include Ikea, Amazon.com (NASDAQ:AMZN), and Walmart (NYSE:WMT).
True, their offerings may not be at premium quality levels. But then again, many consumers may not really care, especially if the prices are at affordable levels. How important is it to have a top-of-the-line item? Well, based on the sluggish sales of TCS, maybe not much.
Bottom Line on Container Store Stock
The restructuring efforts for TCS look to be on the right track. But it will probably take time for the changes to take hold. In the meantime, TCS faces tough challenges. The competitive environment is intense and the company continues to have issues with merchandising.
So weighing the pros and cons, it’s probably best to hold off on buying The Container Store stock for now.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
