TCS - The Container Store: Store Growth Could Ignite The Stock Price

Summary

• The Container Store offers storage services, product storage, and solutions in the United States.
• I believe that opening 76 new stores appears significantly ambitious. Let’s keep in mind that in the last quarterly report, the company noted only 95 stores.
• New improvements of the company’s website, hiring more website designers, and increasing online speed could represent a great strategy against competition.

Storage services provider The Container Store Group, Inc. ( TCS ) expects to open up 76 new stores from now to 2027, which would imply significant revenue growth. I would also expect significant FCF generation thanks to enhancements in the company’s online platform and new loyalty program that were recently announced. Yes, there are risks from changes in international trade regulations or supply chain risks; however, TCS appears quite undervalued at its current stock price.

The Container Store: M&A Expertise, Customer Customization, And Store Growth Expected

The Container Store offers storage services, product storage, and solutions in the United States. The company is primarily focused on retail storage solutions, with a list of products especially designed to provide retail conveniences on the different common areas of a house. Since 2016, the company has been listed by Fortune as one of the 500 companies with the best spaces to work.

I believe that management has accumulated M&A expertise thanks to previous acquisitions, which most financial advisors will likely appreciate. In 2021, Container Store acquired The Closet Company, expanding its product line and gaining the possibility of producing with wood, maximizing customer reach, and developing new design lines for storage within the home. One of the company's greatest values ??is that in addition to providing a long catalog of products with all kinds of storage solutions, it offers the possibility of customizing its products in relation to the needs of its customers.

Considering recent guidance and store growth expected by fiscal 2027, I believe that it is the right time for conducting research about The Container Store. The company brought a prudent scenario for 2022; however, management expects to open 76 new stores in the next four years.

I believe that opening 76 new stores appears significantly ambitious. Let’s keep in mind that in the last quarterly report, the company noted only 95 stores:

The Container Store, Inc. consists of our retail stores, website and call center, as well as our in-home services business. As of October 1, 2022, TCS operates 95 stores. Source: 10-Q

Healthy Financial Position With Little Debt

The balance sheet for October includes cash of $19.814 million together with accounts receivable of $28.624 million, inventory of $190.142 million, and prepaid expenses worth $17.474 million. With income taxes receivable of $1.309 million, total current assets would stand at $267.2 million, more than 1x current liabilities.

Besides, The Container Store reports property and equipment worth $147.302 million, non-current operating lease rights of use assets of $356.605 million, and goodwill of $221.159 million. Trade names stood at $218.882 million, with total non-current assets of $946.657 million and total assets of $1.213 billion.

The Container Store also reported accounts payable of $79.892 million, accrued liabilities of $79.447 million, current borrowings of $13.660 million, and current operating lease liabilities of $56.204 million. Finally, total current liabilities were equal to $231.487 million.

With long-term debt worth $158.465 million and non-current operating lease liabilities of $322.830 million, non-current deferred tax liabilities were equal to $49.804 million. Finally, accompanied by other long-term liabilities of $6.393 million, total non-current liabilities were equal to $537.492 million with total liabilities close to $768.979 million. In my view, with an asset/liability ratio close to 1x and little leverage, The Container Store appears in a good financial position for financing further store growth.

Further Development Of The Container Store’s Online Platform Appears A Competitive Strategy

Regarding the competition, The Container Store has in the first place the recognition of its products and the corporate management of the company as well as its own line of consumers who buy the new designs.

In my view, the development of online platform and the ease of distribution and shipping can play a fundamental role in the keys to differentiation from your competitors. In line with this rationale, I believe that The Container Store is taking steps in the right direction.

Case 1: My Financial Model Indicated A Valuation Of $10-$11 Per Share

Container Store aims to deepen its relationship with its customers, expand its production and distribution capacities, and scale up its profits. Management projects to reach a sum of $2 billion in revenue by the year 2027. At the moment, the company is launching its products with renewed logos and remodeling in its retail stores besides offering ecological products to accompany the change in trends. In addition, the company has created new loyalty programs for its frequent customers offering benefits and promotions.

I am quite optimistic about the future development program to increase the speed of the company's online store. Besides, adding new forms of payment and adding more website designers could enhance user experience and increase the company’s online presence. I assumed that some of these developments would take place from now to the year 2027.

My expected results for 2027 included revenue of $1.432 billion, together with an EBITDA of $156.29 million and an EBIT of $100.91 million. The effective tax rates would remain at 20% with a 2027 EBIAT of $80.728 million.

I also included 2027 depreciation of $55.38 million, changes in accounts receivable of -$2.56 million, changes in inventories of -$11.58 million, and changes in accounts payable of $5.48 million. 2027 capital expenditures would be -$98.93 million, which would imply an FCF of $28.518 million.

If we also assume a WACC of 4.70%, which is close to that of other analysts , I expect a net present value of FCF of $174.87 million. Besides, with an EV/EBITDA multiple of 5x, I foresee a terminal value of $860 million accompanied by an NPV of terminal value close to $683.22 million. With cash of $19 million and a debt of $173 million, the equity would be $529.22 million. Finally, with a share count of 50.629 million, the fair price would be $10.45 million, and the IRR would be 12.67%.

Case 2: Failed Integration Of Acquisitions, Failed Forecasts of Demand, Or International Trade Regulations Could Bring The Fair Price To Around $4.05 Per Share

The Container Store is currently in the process of integrating its recent purchase of The Closet Company as well as opening new retail locations to the public with an eye on future openings. This ambitious plan deserves an operational and management capacity that, if not achieved, could put the commercial capacity of the company at risk. If the acquisition offers less revenue or synergies than expected, goodwill impairments could drive the stock price down.

In addition, due to the type of products that the company sells, the forecasts and projections in this regard may be subject to large changes. The Container Store must be able to read these trends and offer products that meet the demand of its customers. The point in favor in this sense is that it does not concentrate percentages of profits on specific clients.

Finally, the great dependence that the company has on third parties in the distribution of its products and feeding of the supply lines could represent serious risks. Besides, the company is in a position to be affected by future regulations in international trade, which may also lead to lower FCF margins.

My forecasts for 2027 account for a revenue of $1.101 billion, an EBITDA of $110.1 million, and 2027 EBIT of $67.5 million. 2027 EBIAT would be close to $52.3 million accompanied by a depreciation of $42.6 million. Changes in accounts receivable would be -$0.1 million with changes in inventories of -$0.5 million in addition to changes in accounts payable of $0.2 million. Finally, with capex of -$76.1 million, I would expect 2027 FCF of $18.5 million.

Under this case scenario, the WACC and the cost of equity could also increase as demand for the stock would lower. If we assume a WACC of 15%, the NPV of future FCF would be $112.72 million. Also, with an EV/EBITDA of 6.55x, the terminal value would be $721 million with NPV of $358.67 million. Finally, with cash of $19 million and a debt of $173 million, I obtained equity of $204.67 million, a fair price of $4.05 per share, and an internal rate of return of -6.88%.

My Takeaway

The Container Store expects to increase its store count significantly. In the last quarterly report, management noted 95 stores, and expects to open up 76 more, which would most likely lead to significant revenue and FCF generation. In my opinion, new improvements of the company’s website, hiring more website designers, and increasing online speed could represent a great strategy against competition. With very conservative assumptions, I obtained a fair valuation that is close to $10-$11 per share, which implies that the stock is currently undervalued.

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