TGT - The Container Store: A Sinking Ship Trying To Right Itself

2023-06-05 08:58:07 ET

Summary

• The stock of The Container Store has sunk some 70% since we first looked at it some 14 months ago.
• Retailers continue to face a challenging consumer environment on myriad fronts. Have the shares sunk into bargain bin territory yet?
• An updated investment analysis follows in the paragraphs below.

"Whoever said that money can't buy happiness simply didn't know where to go shopping ."- Bo Derek

It has been just over a year since our initial article on The Container Store ( TCS ). We concluded that piece around this retail concern in the following way:

The stock trades at a price-to-FY21E (and FY22E) of under 0.4, an EV-to-EBIDTA of 3.2, and a price-to-FY22E earnings of 6.5. These are values that should put a floor under shares of TCS, but they don't have much upside until management can change Street perceptions about its growth prospects. As such, the recommendation is to remain on the sidelines ."

Staying out of these shares was the right call in hindsight as the stock has fallen nearly 70% since our first look at this company. Are the shares finally in the ' bargain bin '? An analysis follows below.

Company Overview:

The Container Store as the name implies is a specialty retailer focused on providing customers with storage and organizational solutions both overseas and via nearly 100 stores in over 30 states here in this country. The stock currently trades at around $2.75 a share and sports an approximate market capitalization of $135 million. The company's fiscal year begins on April 1st.

Fourth Quarter Results:

The company posted results from its final quarter of the FY2023 on May 16th. The Container Store managed a non-GAAP profit of 18 cents a share even as sales fell 15% on a year-over-year basis to just under $260 million. Earnings were two pennies a share better than expected despite revenues coming in $6 million light.

It is important to note that the company's fourth quarter loss per diluted share of $3.85 as The Container Store took a one-time $197.7 million non-cash goodwill impairment charge in the quarter. This compares to 46 cents a share of profit in the same period a year ago. For the full year, the company had consolidated net sales of $1.05 billion, which was down 4.3% which included a 3.7% drop in same store sales.

And things are likely to get worse before they get better on the revenue front as management has guided sales will be down in the mid to high teens in the current fiscal year vis a vis FY2023. During 2022, the company did launch multiple new large-scale programs to improve their product offerings even as they strategically discontinued their Closet Works wholesale business.

Analyst Commentary & Balance Sheet:

Since fourth quarter results came out, Goldman Sachs maintained their Hold rating and two buck price target on TCS. Lake Street reissued their Buy rating but lowered their price target to $5 a share from $7 previously.

In mid-May, two insiders including the CEO bought just over $140,000 worth of equity collectively. That is the only insider activity in the stock so far in 2023. Just over three percent of the shares outstanding are currently held short.

The company repurchased $5 million worth of its own stock in the fourth quarter and still has $25 million remaining on a stock repurchase authorization. The company opened two new stores in the quarter to bring its store count in the U.S. to 97. It plans to open six stores overall in FY2024, tilted to the back half of the year and three more in the first quarter of FY2025.

The company had negative free cash flow of $4.9 million in the fourth quarter and its cash balances were drawn down by nearly $7.3 million.

The company described its contractual cash obligations over the next several periods as follows (in thousands) in its latest 10-K :

Consolidated inventory dropped 11.5% from the same period a year ago. At the end of FY2023, The Container Store had $7 million in cash, $167.9 million of total debt and total liquidity, including availability on their revolving credit facilities of $107 million. The company's leverage ratio was 1.4 times.

Verdict:

The current analyst consensus has the company earning 9 cents a share in FY2024 even as sales decline 14% to just under $900 million. The two analyst firms that have posted projections for FY2025 have the company earning 40 to 68 cents a share as sales rebound by mid-single digits.

If the country was on the verge of emerging from a recession instead of likely going into one over the next 12 months, I might give TCS some investment consideration give a very low price to sales valuation of approximately 25% of last year's revenues. However, as I noted in a recent article on Target Corporation ( TGT ) signs are clearly pointing to an economic contraction ahead.

Manufacturing has been in recessionary territory for six straight months now after thirty straight months of expansionary readings. In addition, the treasury yield curve is as inverted as it has been since before the major recession of the early '80s, and the Leading Economic Indicators have been pointing to a pending economic contraction for some time now ."

I am also not a big fan of management expanding its store base into this environment especially as same store sales are dropping, and I would probably not be buying back stock given the debt on the balance sheet either. In short, until the economic environment improves and the same store sales start to at least flat-line, I am passing on any investment in The Container Store.

"If men liked shopping, they'd call it research ."? Cynthia Nelms

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