UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.DC 20549
Form 10-Q
(Mark One)
þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended December 30, 2017June 29, 2019
ORor
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number: 001-36161
THE CONTAINER STORE GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware | 26-0565401 | ||
(State or other jurisdiction of incorporation or organization) | ( |
500 Freeport Parkway, Coppell, TX | 75019 | |||||||
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| (Zip Code) |
Registrant’s telephone number, in the United States, including area code, is:code: (972) 538-6000
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | TCS | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ☑ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ☑ No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | Non-accelerated filer | |
Smaller reporting company | Emerging growth company☐ |
| |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. þ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No þ☑
The registrant had 48,328,84049,233,210 shares of its common stock outstanding as of February 2, 2018.July 26, 2019.
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PART I. | FINANCIAL INFORMATION |
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Item 1. | Financial Statements |
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9 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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33 |
2
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PART I. | FINANCIAL INFORMATION |
Item 1. | Financial Statements |
The Container Store Group, Inc.
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|
| June 29, |
| March 30, |
| June 30, | |||
(In thousands) |
| 2019 |
| 2019 |
| 2018 | |||
Assets |
| (unaudited) |
|
|
|
| (unaudited) | ||
Current assets: |
|
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|
|
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Cash |
| $ | 11,404 |
| $ | 7,364 |
| $ | 14,102 |
Accounts receivable, net |
|
| 27,821 |
|
| 25,568 |
|
| 24,840 |
Inventory |
|
| 120,512 |
|
| 108,650 |
|
| 104,135 |
Prepaid expenses |
|
| 11,129 |
|
| 10,078 |
|
| 10,842 |
Income taxes receivable |
|
| 1,124 |
|
| 1,003 |
|
| 812 |
Other current assets |
|
| 11,867 |
|
| 11,705 |
|
| 12,577 |
Total current assets |
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| 183,857 |
|
| 164,368 |
|
| 167,308 |
Noncurrent assets: |
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Property and equipment, net |
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| 152,448 |
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| 152,588 |
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| 151,455 |
Noncurrent operating lease assets |
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| 353,490 |
|
| — |
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| — |
Goodwill |
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| 202,815 |
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| 202,815 |
|
| 202,815 |
Trade names |
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| 225,182 |
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| 225,150 |
|
| 226,613 |
Deferred financing costs, net |
|
| 223 |
|
| 241 |
|
| 294 |
Noncurrent deferred tax assets, net |
|
| 1,898 |
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| 1,912 |
|
| 2,101 |
Other assets |
|
| 1,607 |
|
| 1,670 |
|
| 1,777 |
Total noncurrent assets |
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| 937,663 |
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| 584,376 |
|
| 585,055 |
Total assets |
| $ | 1,121,520 |
| $ | 748,744 |
| $ | 752,363 |
See accompanying notes.
3
The Container Store Group, Inc.
Consolidated balance sheets (continued)
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| June 29, |
| March 30, |
| June 30, | |||
(In thousands, except share and per share amounts) |
| 2019 |
| 2019 |
| 2018 | |||
Liabilities and shareholders’ equity |
| (unaudited) |
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| (unaudited) | ||
Current liabilities: |
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Accounts payable |
| $ | 55,387 |
| $ | 58,734 |
| $ | 52,215 |
Accrued liabilities |
|
| 68,507 |
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| 67,163 |
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| 71,817 |
Revolving lines of credit |
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| 9,951 |
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| 5,511 |
|
| 889 |
Current portion of long-term debt |
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| 6,931 |
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| 7,016 |
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| 7,780 |
Current operating lease liabilities |
|
| 58,664 |
|
| — |
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| — |
Income taxes payable |
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| 2,011 |
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| 2,851 |
|
| 2,019 |
Total current liabilities |
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| 201,451 |
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| 141,275 |
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| 134,720 |
Noncurrent liabilities: |
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Long-term debt |
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| 272,556 |
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| 254,960 |
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| 291,038 |
Noncurrent operating lease liabilities |
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| 327,221 |
|
| — |
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| — |
Noncurrent deferred tax liabilities, net |
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| 50,182 |
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| 51,702 |
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| 49,378 |
Other long-term liabilities |
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| 8,903 |
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| 36,114 |
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| 41,337 |
Total noncurrent liabilities |
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| 658,862 |
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| 342,776 |
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| 381,753 |
Total liabilities |
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| 860,313 |
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| 484,051 |
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| 516,473 |
Commitments and contingencies (Note 6) |
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Shareholders’ equity: |
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Common stock, $0.01 par value, 250,000,000 shares authorized; 48,283,197 shares issued at June 29, 2019; 48,142,319 shares issued at March 30, 2019; 48,138,907 shares issued at June 30, 2018 |
|
| 483 |
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| 481 |
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| 481 |
Additional paid-in capital |
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| 864,386 |
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| 863,978 |
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| 861,726 |
Accumulated other comprehensive loss |
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| (25,929) |
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| (26,132) |
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| (24,239) |
Retained deficit |
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| (577,733) |
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| (573,634) |
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| (602,078) |
Total shareholders’ equity |
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| 261,207 |
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| 264,693 |
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| 235,890 |
Total liabilities and shareholders’ equity |
| $ | 1,121,520 |
| $ | 748,744 |
| $ | 752,363 |
See accompanying notes.
4
The Container Store Group, Inc.
Consolidated statements of operations
lunch |
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| Thirteen Weeks Ended | ||||
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| June 29, |
| June 30, | ||
(In thousands, except share and per share amounts) (unaudited) |
| 2019 |
| 2018 | ||
Net sales |
| $ | 209,520 |
| $ | 195,823 |
Cost of sales (excluding depreciation and amortization) |
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| 89,713 |
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| 81,052 |
Gross profit |
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| 119,807 |
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| 114,771 |
Selling, general, and administrative expenses (excluding depreciation and amortization) |
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| 109,029 |
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| 106,605 |
Stock-based compensation |
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| 811 |
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| 586 |
Pre-opening costs |
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| 477 |
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| 346 |
Depreciation and amortization |
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| 9,706 |
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| 9,337 |
Other (income) expenses |
|
| (27) |
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| 193 |
(Gain) loss on disposal of assets |
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| (4) |
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| 40 |
Loss from operations |
|
| (185) |
|
| (2,336) |
Interest expense, net |
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| 5,709 |
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| 7,908 |
Loss before taxes |
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| (5,894) |
|
| (10,244) |
Benefit for income taxes |
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| (1,795) |
|
| (3,480) |
Net loss |
| $ | (4,099) |
| $ | (6,764) |
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Net loss per common share—basic and diluted |
| $ | (0.08) |
| $ | (0.14) |
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Weighted-average common shares—basic and diluted |
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| 48,231,148 |
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| 48,138,907 |
See accompanying notes.
5
The Container Store Group, Inc.
Consolidated statements of comprehensive loss
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| Thirteen Weeks Ended | ||||
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| June 29, |
| June 30, | ||
(In thousands) (unaudited) |
| 2019 |
| 2018 | ||
Net loss |
| $ | (4,099) |
| $ | (6,764) |
Unrealized loss on financial instruments, net of tax benefit of $(18) and $(566) |
|
| (128) |
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| (1,785) |
Pension liability adjustment, net of tax provision |
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| (2) |
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| 153 |
Foreign currency translation adjustment |
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| 333 |
|
| (5,291) |
Comprehensive loss |
| $ | (3,896) |
| $ | (13,687) |
See accompanying notes.
6
CoThe Container Store Group, Inc.
Consolidated statements of cash flows
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| Thirteen Weeks Ended | ||||
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| June 29, |
| June 30, | ||
(In thousands) (unaudited) |
| 2019 |
| 2018 | ||
Operating activities |
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Net loss |
| $ | (4,099) |
| $ | (6,764) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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| 9,706 |
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| 9,337 |
Stock-based compensation |
|
| 811 |
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| 586 |
(Gain) loss on disposal of assets |
|
| (4) |
|
| 40 |
Deferred tax benefit |
|
| (1,891) |
|
| (3,874) |
Non-cash interest |
|
| 465 |
|
| 759 |
Changes in operating assets and liabilities: |
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Accounts receivable |
|
| (2,200) |
|
| 110 |
Inventory |
|
| (11,923) |
|
| (9,975) |
Prepaid expenses and other assets |
|
| (670) |
|
| (198) |
Accounts payable and accrued liabilities |
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| 2,275 |
|
| 10,030 |
Net change in lease assets and liabilities |
|
| (152) |
|
| — |
Income taxes |
|
| (1,009) |
|
| (3,303) |
Other noncurrent liabilities |
|
| 370 |
|
| (68) |
Net cash used in operating activities |
|
| (8,321) |
|
| (3,320) |
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Investing activities |
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Additions to property and equipment |
|
| (8,703) |
|
| (4,456) |
Proceeds from sale of property and equipment |
|
| 4 |
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| 1 |
Net cash used in investing activities |
|
| (8,699) |
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| (4,455) |
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Financing activities |
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Borrowings on revolving lines of credit |
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| 17,961 |
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| 7,581 |
Payments on revolving lines of credit |
|
| (13,599) |
|
| (6,663) |
Borrowings on long-term debt |
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| 19,000 |
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| 15,000 |
Payments on long-term debt |
|
| (1,741) |
|
| (1,954) |
Payment of taxes with shares withheld upon restricted stock vesting |
|
| (347) |
|
| (122) |
Net cash provided by financing activities |
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| 21,274 |
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| 13,842 |
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Effect of exchange rate changes on cash |
|
| (214) |
|
| (364) |
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Net increase in cash |
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| 4,040 |
|
| 5,703 |
Cash at beginning of fiscal period |
|
| 7,364 |
|
| 8,399 |
Cash at end of fiscal period |
| $ | 11,404 |
| $ | 14,102 |
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Supplemental information for non-cash investing and financing activities: |
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Purchases of property and equipment (included in accounts payable) |
| $ | 1,590 |
| $ | 852 |
See accompanying notes.
7
The Container Store Group Inc.
Consolidated statements of shareholder’s equity
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| December 30, |
| April 1, |
| December 31, |
|
|
| 2017 |
| 2017 |
| 2016 |
|
(In thousands) |
| (unaudited) |
|
|
| (unaudited) |
|
Assets |
|
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Current assets: |
|
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Cash |
| $22,653 |
| $10,736 |
| $18,491 |
|
Accounts receivable, net |
| 29,548 |
| 27,476 |
| 31,344 |
|
Inventory |
| 110,391 |
| 103,120 |
| 109,009 |
|
Prepaid expenses |
| 11,668 |
| 10,550 |
| 10,815 |
|
Income taxes receivable |
| 1,450 |
| 16 |
| - |
|
Other current assets |
| 10,338 |
| 10,787 |
| 12,319 |
|
Total current assets |
| 186,048 |
| 162,685 |
| 181,978 |
|
Noncurrent assets: |
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|
Property and equipment, net |
| 160,836 |
| 165,498 |
| 166,428 |
|
Goodwill |
| 202,815 |
| 202,815 |
| 202,815 |
|
Trade names |
| 230,379 |
| 226,685 |
| 226,050 |
|
Deferred financing costs, net |
| 329 |
| 320 |
| 343 |
|
Noncurrent deferred tax assets, net |
| 2,308 |
| 2,139 |
| 1,080 |
|
Other assets |
| 1,684 |
| 1,692 |
| 1,420 |
|
Total noncurrent assets |
| 598,351 |
| 599,149 |
| 598,136 |
|
Total assets |
| $784,399 |
| $761,834 |
| $780,114 |
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| Accumulated |
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| Additional |
| other |
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| Total | |||||
(In thousands, except share amounts) |
| Par |
| Common stock |
| paid-in |
| comprehensive |
| Retained |
| shareholders’ | ||||||||
(unaudited) |
| value |
| Shares |
| Amount |
| capital |
| loss |
| deficit |
| equity | ||||||
Balance at March 30, 2019 |
| $ | 0.01 |
| 48,142,319 |
| $ | 481 |
| $ | 863,978 |
| $ | (26,132) |
| $ | (573,634) |
| $ | 264,693 |
Net loss |
|
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| (4,099) |
|
| (4,099) |
Stock-based compensation |
|
|
|
| — |
|
| — |
|
| 811 |
|
| — |
|
| — |
|
| 811 |
Vesting of restricted stock awards |
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|
| 140,878 |
|
| 2 |
|
| (56) |
|
| — |
|
| — |
|
| (54) |
Taxes related to net share settlement of restricted stock awards |
|
|
|
| — |
|
| — |
|
| (347) |
|
| — |
|
| — |
|
| (347) |
Foreign currency translation adjustment |
|
|
|
| — |
|
| — |
|
| — |
|
| 333 |
|
| — |
|
| 333 |
Unrealized gain on financial instruments, net of ($18) tax benefit |
|
|
|
| — |
|
| — |
|
| — |
|
| (128) |
|
| — |
|
| (128) |
Pension liability adjustment, net of $0 tax benefit |
|
|
|
| — |
|
| — |
|
| — |
|
| (2) |
|
| — |
|
| (2) |
Balance at June 29, 2019 |
| $ | 0.01 |
| 48,283,197 |
|
| 483 |
|
| 864,386 |
|
| (25,929) |
|
| (577,733) |
|
| 261,207 |
|
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Balance at March 31, 2018 |
| $ | 0.01 |
| 48,072,187 |
| $ | 481 |
| $ | 861,263 |
| $ | (17,316) |
| $ | (595,721) |
| $ | 248,707 |
Net loss |
|
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| (6,764) |
|
| (6,764) |
Stock-based compensation |
|
|
|
| — |
|
| — |
|
| 586 |
|
| — |
|
| — |
|
| 586 |
Vesting of restricted stock awards |
|
|
|
| 66,720 |
|
| — |
|
| (1) |
|
| — |
|
| — |
|
| (1) |
Taxes related to net share settlement of restricted stock awards |
|
|
|
| — |
|
| — |
|
| (122) |
|
| — |
|
| — |
|
| (122) |
Cumulative adjustment for adoption of ASC 606 |
|
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| 407 |
|
| 407 |
Foreign currency translation adjustment |
|
|
|
| — |
|
| — |
|
| — |
|
| (5,291) |
|
| — |
|
| (5,291) |
Unrealized gain on financial instruments, net of ($566) tax benefit |
|
|
|
| — |
|
| — |
|
| — |
|
| (1,785) |
|
| — |
|
| (1,785) |
Pension liability adjustment, net of $39 tax provision |
|
|
|
| — |
|
| — |
|
| — |
|
| 153 |
|
| — |
|
| 153 |
Balance at June 30, 2018 |
| $ | 0.01 |
| 48,138,907 |
|
| 481 |
|
| 861,726 |
|
| (24,239) |
|
| (602,078) |
|
| 235,890 |
See accompanying notes.
8
The Container Store Group, Inc.
Consolidated balance sheets (continued)
|
|
|
|
|
|
|
|
|
| December 30, |
| April 1, |
| December 31, |
|
|
| 2017 |
| 2017 |
| 2016 |
|
(In thousands, except share and per share amounts) |
| (unaudited) |
|
|
| (unaudited) |
|
Liabilities and shareholders’ equity |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Accounts payable |
| $53,757 |
| $44,762 |
| $49,057 |
|
Accrued liabilities |
| 73,539 |
| 60,107 |
| 64,552 |
|
Current portion of long-term debt (see Note 3 for amounts due to related party) |
| 9,465 |
| 5,445 |
| 5,390 |
|
Income taxes payable |
| 1,690 |
| 2,738 |
| 4,156 |
|
Total current liabilities |
| 138,451 |
| 113,052 |
| 123,155 |
|
Noncurrent liabilities: |
|
|
|
|
|
|
|
Long-term debt (see Note 3 for amounts due to related party) |
| 304,638 |
| 312,026 |
| 332,900 |
|
Noncurrent deferred tax liabilities, net |
| 56,706 |
| 80,679 |
| 79,672 |
|
Deferred rent and other long-term liabilities |
| 32,941 |
| 34,287 |
| 33,020 |
|
Total noncurrent liabilities |
| 394,285 |
| 426,992 |
| 445,592 |
|
Total liabilities |
| 532,736 |
| 540,044 |
| 568,747 |
|
|
|
|
|
|
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|
|
Commitments and contingencies (Note 6) |
|
|
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|
|
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Shareholders’ equity: |
|
|
|
|
|
|
|
Common stock, $0.01 par value, 250,000,000 shares authorized; 48,072,187 shares issued at December 30, 2017; 48,045,114 shares issued at April 1, 2017; 48,003,359 shares issued at December 31, 2016 |
| 481 |
| 480 |
| 480 |
|
Additional paid-in capital |
| 860,827 |
| 859,102 |
| 858,460 |
|
Accumulated other comprehensive loss |
| (14,323 | ) | (22,643 | ) | (24,047 | ) |
Retained deficit |
| (595,322 | ) | (615,149 | ) | (623,526 | ) |
Total shareholders’ equity |
| 251,663 |
| 221,790 |
| 211,367 |
|
Total liabilities and shareholders’ equity |
| $784,399 |
| $761,834 |
| $780,114 |
|
See accompanying notes.
The Container Store Group, Inc.
Consolidated statements of operations
|
|
|
|
|
| ||||
|
| Thirteen Weeks Ended |
| Thirty-Nine Weeks Ended |
| ||||
|
| December 30, |
| December 31, |
| December 30, |
| December 31, |
|
(In thousands, except share and per share amounts) (unaudited) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
Net sales |
| $222,986 |
| $216,380 |
| $624,464 |
| $598,888 |
|
Cost of sales (excluding depreciation and amortization) |
| 92,425 |
| 90,678 |
| 263,919 |
| 250,136 |
|
Gross profit |
| 130,561 |
| 125,702 |
| 360,545 |
| 348,752 |
|
Selling, general, and administrative expenses (excluding depreciation and amortization) |
| 103,894 |
| 100,206 |
| 306,866 |
| 288,037 |
|
Stock-based compensation |
| 585 |
| 599 |
| 1,589 |
| 1,355 |
|
Pre-opening costs |
| 1,872 |
| 2,918 |
| 4,676 |
| 6,558 |
|
Depreciation and amortization |
| 9,477 |
| 9,236 |
| 28,524 |
| 28,061 |
|
Other expenses |
| 751 |
| 182 |
| 4,908 |
| 839 |
|
Loss on disposal of assets |
| 83 |
| - |
| 236 |
| 41 |
|
Income from operations |
| 13,899 |
| 12,561 |
| 13,746 |
| 23,861 |
|
Interest expense |
| 7,300 |
| 4,119 |
| 17,398 |
| 12,434 |
|
Loss on extinguishment of debt |
| - |
| - |
| 2,369 |
| - |
|
Income (loss) before taxes |
| 6,599 |
| 8,442 |
| (6,021 | ) | 11,427 |
|
(Benefit) provision for income taxes |
| (21,780 | ) | 3,350 |
| (25,848 | ) | 4,851 |
|
Net income |
| $28,379 |
| $5,092 |
| $19,827 |
| $6,576 |
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - basic and diluted |
| $0.59 |
| $0.11 |
| $0.41 |
| $0.14 |
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares - basic |
| 48,067,754 |
| 47,999,535 |
| 48,057,974 |
| 47,992,652 |
|
Weighted-average common shares - diluted |
| 48,167,882 |
| 48,022,499 |
| 48,128,682 |
| 48,002,495 |
|
See accompanying notes.
The Container Store Group, Inc.
Consolidated statements of comprehensive income (loss)
|
|
|
|
|
| ||||
|
| Thirteen Weeks Ended |
| Thirty-Nine Weeks Ended |
| ||||
|
| December 30, |
| December 31, |
| December 30, |
| December 31, |
|
(In thousands) (unaudited) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
Net income |
| $28,379 |
| $5,092 |
| $19,827 |
| $6,576 |
|
Unrealized (loss) gain on financial instruments, net of tax (benefit) provision of $(595), $(391), $951, and $(407) |
| (713 | ) | (610) |
| 1,687 |
| (636 | ) |
Pension liability adjustment |
| 5 |
| 71 |
| (175 | ) | 146 |
|
Foreign currency translation adjustment |
| 480 |
| (4,296) |
| 6,808 |
| (7,721 | ) |
Comprehensive income (loss) |
| $28,151 |
| $257 |
| $28,147 |
| $(1,635 | ) |
See accompanying notes.
The Container Store Group, Inc.
Consolidated statements of cash flows
|
|
|
|
|
|
|
| Thirty-Nine Weeks Ended |
| ||
|
| December 30, |
| December 31, |
|
(In thousands) (unaudited) |
| 2017 |
| 2016 |
|
Operating activities |
|
|
|
|
|
Net income |
| $19,827 |
| $6,576 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
Depreciation and amortization |
| 28,524 |
| 28,061 |
|
Stock-based compensation |
| 1,589 |
| 1,355 |
|
Loss on disposal of property and equipment |
| 236 |
| 41 |
|
Loss on extinguishment of debt |
| 2,369 |
| - |
|
Deferred tax benefit |
| (27,255 | ) | (1,044 | ) |
Noncash interest |
| 1,905 |
| 1,441 |
|
Other |
| 326 |
| (135 | ) |
Changes in operating assets and liabilities: |
|
|
|
|
|
Accounts receivable |
| (727 | ) | (9,843 | ) |
Inventory |
| (2,665 | ) | (25,686 | ) |
Prepaid expenses and other assets |
| 233 |
| 2,932 |
|
Accounts payable and accrued liabilities |
| 19,627 |
| 19,882 |
|
Income taxes |
| (2,461 | ) | 5,089 |
|
Other noncurrent liabilities |
| (2,136 | ) | (4,794 | ) |
Net cash provided by operating activities |
| 39,392 |
| 23,875 |
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
Additions to property and equipment |
| (20,101 | ) | (21,010 | ) |
Proceeds from sale of property and equipment |
| 19 |
| 7 |
|
Net cash used in investing activities |
| (20,082 | ) | (21,003 | ) |
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
Borrowings on revolving lines of credit |
| 47,054 |
| 43,135 |
|
Payments on revolving lines of credit |
| (47,054 | ) | (46,653 | ) |
Borrowings on long-term debt |
| 335,000 |
| 30,000 |
|
Payments on long-term debt |
| (331,885 | ) | (19,121 | ) |
Payment of taxes with shares withheld upon restricted stock vesting |
| (39 | ) | - |
|
Payment of debt issuance costs |
| (11,246 | ) | - |
|
Net cash (used in) provided by financing activities |
| (8,170 | ) | 7,361 |
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
| 777 |
| (551 | ) |
Net increase in cash |
| 11,917 |
| 9,682 |
|
Cash at beginning of period |
| 10,736 |
| 8,809 |
|
Cash at end of period |
| $22,653 |
| $18,491 |
|
|
|
|
|
|
|
Supplemental information for non-cash investing and financing activities: |
|
|
|
|
|
Purchases of property and equipment (included in accounts payable) |
| $894 |
| $304 |
|
Capital lease obligation incurred |
| $178 |
| $658 |
|
|
|
|
|
|
|
See accompanying notes.
The Container Store Group, Inc.
Notes to consolidated financial statements (unaudited)
(In thousands, except share amounts and unless otherwise stated)
June 29, 2019
otherwise stated)
December 30, 2017
1.Description of business and basis of presentation
These financial statements should be read in conjunction with the financial statement disclosures in our Annual Report on Form 10-K for the fiscal year ended April 1, 2017,March 30, 2019, filed with the Securities and Exchange Commission on June 1, 2017.May 30, 2019 (the “2018 Annual Report on Form 10-K”). The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). We use the same accounting policies in preparing quarterly and annual financial statements.statements, with the exception of lease accounting as discussed further below. All adjustments necessary for a fair presentation of quarterly operating results are reflected herein and are of a normal, recurring nature. Certain items in these consolidated financial statements have been reclassified to conform to the current period presentation.
All references herein to “fiscal 2019” refer to the 52-week fiscal year ending March 28, 2020, “fiscal 2018” refer to the 52-week fiscal year ended March 30, 2019, and “fiscal 2017” refer to the 52-week fiscal year ended March 31, 2018.
Description of business
The Container Store, Inc. was founded in 1978 in Dallas, Texas, as a retailer with a mission to provide customers with storage and organization solutions through an assortment of innovative products and unparalleled customer service. In 2007, The Container Store, Inc. was sold to The Container Store Group, Inc. (the “Company”), a holding company, of which a majority stake was purchased by Leonard Green and Partners, L.P. (“LGP”), with the remainder held by certain employees of The Container Store, Inc. On November 6, 2013, the Company completed its initial public offering (the “IPO”). As the majority shareholder, LGP retains a controlling interest in the Company. As of December 30, 2017,June 29, 2019, The Container Store, Inc. (“TCS”) operates 9092 stores with an average size of approximately 25,000 square feet (19,000 selling square feet) in 3233 states and the District of Columbia. The Container Store, Inc. also offers all of its products directly to its customers including business-to-business customers,(including business customers), through its website and call center. The Container Store, Inc.’s wholly-owned Swedish subsidiary, Elfa International AB (“Elfa”), designs and manufactures component-based shelving and drawer systems and made-to-measure sliding doors. elfa® branded products are sold exclusively in the United States in The Container Store retail stores, website and call center, and Elfa sells to various retailers on a wholesale basis in approximately 30 countries around the world, with a concentration in the Nordic region of Europe.
Seasonality
The Company’s business is moderately seasonal in nature and, therefore, the results of operations for the thirty-ninethirteen weeks ended December 30, 2017June 29, 2019 are not necessarily indicative of the operating results for the full year. The Company has historically realized a higher portion of net sales, operating income, and cash flows from operations in the fourth fiscal quarter, attributable primarily to the timing and impact of Our Annual elfa® Sale, which traditionally starts on or aboutin late December 24 and runs into February.
Recent accounting pronouncements
In February 2016, the Financial Accounting StandardStandards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), to revise lease accounting guidance. The update requires most leases to be recorded on the balance sheet as a lease liability, with a corresponding right-of-use asset, whereas these leases currently havepreviously had an off-balance sheet classification. ASU 2016-02 must be applied on a modified retrospective basis and is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted.years. The Company currently intends to adoptadopted this standard in the first quarter of fiscal 2019.2019 and elected certain practical expedients permitted under the transition guidance, including the package of practical expedients; however, the Company did not elect the hindsight practical expedient. Additionally, the Company elected the optional transition method that allowed for a cumulative-effect adjustment in the period of adoption and did not restate prior periods. The Company is
still evaluating the impactadoption of implementation of this standard on its financial statements, but expects that adoption will have a material impact to the Company’sASU 2016-02 resulted in an increase in total assets and total liabilities given the Company has a significant number of operating leases not currently recognized on its balance sheet.$352,059 at transition. However,
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, an updated standard on revenue recognition. ASU 2014-09 provides enhancements to the quality and consistency9
this standard in the first quarter of fiscal 2018 and the Company has elected to use the modified-retrospective approach for implementation of the standard. Overall, the Company doesdid not expect the adoption of ASU 2014-09 to have a material impact on the financial statements.consolidated statement of operations or the consolidated statement of cash flows. See Note 3 for further discussion on leases.
In MarchJuly 2016, the FASB issued ASU 2016-09, Compensation 2016-13, Financial Instruments – Stock CompensationCredit Losses (Topic 718)326): ImprovementsMeasurement of Credit Losses on Financial Instruments. ASU 2016-13 changes how to Employee Share-Based Payment Accounting, which outlined new provisions intended to simplify various aspects related to accounting for share-based payments, including income tax consequences, forfeitures,recognize expected credit losses on financial assets. The standard requires a more timely recognition of credit losses on loans and classification in the statement of cash flows. Underother financial assets and also provides additional transparency about credit risk. The current credit loss standard generally requires that a loss actually be incurred before it is recognized, while the new guidance, an entitystandard will no longer record excess tax benefitsrequire recognition of full lifetime expected losses upon initial recognition of the financial instrument. The Company is required to adopt ASU 2016-13 for fiscal years, and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement when the awards vest or are settled. This standard was effective for and adopted by the Company in the first quarter ofinterim periods within those fiscal 2017 and the Company now recognizes all income tax effects of share-based payments in the income statementyears, beginning after December 15, 2019 on a prospectivemodified retrospective basis. The Company electedEarly adoption is permitted for fiscal years beginning after December 15, 2018. An entity should apply the standard by recording a cumulative effect adjustment to continue to estimate forfeitures expected to occur to determine the amount of share-based compensation cost to recognize in each period, as permitted by ASU 2016-09. retained earnings upon adoption. The adoption of ASU 2016-09 didthis standard is not expected to result in a material impact to the Company’s financial statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires entities to recognize the income tax effects of intercompany sales and transfers of assets, other than inventory, in the period in which the transfer occurs. This is a change from current GAAP, which requires entities to defer the income tax effects of intercompany transfers of assets until the asset has been sold to an outside party or otherwise recognized (i.e. depreciated, amortized, impaired). The income tax effects of intercompany sales and transfers of inventory will continue to be deferred until the inventory is sold to an outside party. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company does not expect this standard to have a material impact on its financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which provides guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test under ASC Topic 350. Under the new guidance, an entity should perform goodwill impairment testing by comparing the fair value of a reporting unit with its carrying amount. If the reporting unit’s carrying amount exceeds its fair value, an entity should recognize an impairment charge based on that difference, limited to the total amount of goodwill allocated to that reporting unit. The Company elected to
early adopt this standard in the third quarter of fiscal 2017 on a prospective basis. The adoption of ASU 2017-04 did not result in a material impact to the Company’s financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which provides guidance that requires an employer to present the service cost component separate from the other components of net periodic benefit cost. The update requires that employers present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered by participating employees during the period. The other components of the net periodic benefit cost are required to be presented separately from the line item that includes service cost and outside of the subtotal of income from operations. If a separate line item is not used, the line item used in the income statement must be disclosed. In addition, only the service cost component is eligible for capitalization in assets. This ASU will be applied retrospectively and is effective for fiscal years beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company does not expect this standard to have a material impact on its financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when modification accounting should be applied for changes to terms or conditions of a share-based payment award. This ASU will be applied prospectively and is effective for fiscal years beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company does not expect this standard to have a material impact on its financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which is intended to improve and simplify hedge accounting and improve the disclosures of hedging arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluatingadoption of this standard did not result in a material impact to the impact of adopting the new standard on itsCompany’s financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under this ASU, the guidance on share-based payments to nonemployees would be aligned with the requirements for share-based payments granted to employees, with certain exceptions. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those years. The adoption of this standard did not result in a material impact to the Company’s financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification (“ASC”) 350-40 to determine which implementation costs to capitalize as assets. A customer’s accounting for the costs of the hosting component of the arrangement are not affected by the new guidance. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The adoption of this standard is not expected to result in a material impact to the Company’s financial statements.
10
2. Detail of certain balance sheet accounts
|
| December 30, |
| April 1, |
| December 31, |
|
|
| 2017 |
| 2017 |
| 2016 |
|
Inventory: |
|
|
|
|
|
|
|
Finished goods |
| $104,714 |
| $98,438 |
| $104,374 |
|
Raw materials |
| 5,139 |
| 4,183 |
| 4,288 |
|
Work in progress |
| 538 |
| 499 |
| 347 |
|
|
| $110,391 |
| $103,120 |
| $109,009 |
|
|
|
|
|
|
|
|
|
Accrued liabilities: |
|
|
|
|
|
|
|
Accrued payroll, benefits, and bonuses |
| $26,526 |
| $20,897 |
| $21,859 |
|
Unearned revenue |
| 10,197 |
| 7,708 |
| 8,651 |
|
Accrued transaction and property tax |
| 12,621 |
| 11,086 |
| 11,203 |
|
Gift cards and store credits outstanding |
| 9,984 |
| 9,229 |
| 10,147 |
|
Accrued lease liabilities |
| 6,329 |
| 4,767 |
| 4,815 |
|
Accrued interest |
| 156 |
| 143 |
| 194 |
|
Other accrued liabilities |
| 7,726 |
| 6,277 |
| 7,683 |
|
|
| $73,539 |
| $60,107 |
| $64,552 |
|
3. Long-term debt and revolving lines of credit
|
|
|
|
|
|
|
|
|
|
|
| June 29, |
| March 30, |
| June 30, | |||
|
| 2019 |
| 2019 |
| 2018 | |||
Accounts receivable, net: |
|
|
|
|
|
|
|
|
|
Trade receivables, net |
| $ | 15,366 |
| $ | 16,730 |
| $ | 12,898 |
Credit card receivables |
|
| 10,677 |
|
| 7,244 |
|
| 10,054 |
Tenant allowances |
|
| 325 |
|
| 110 |
|
| 235 |
Other receivables |
|
| 1,453 |
|
| 1,484 |
|
| 1,653 |
|
| $ | 27,821 |
| $ | 25,568 |
| $ | 24,840 |
Inventory: |
|
|
|
|
|
|
|
|
|
Finished goods |
| $ | 115,536 |
| $ | 103,774 |
| $ | 98,851 |
Raw materials |
|
| 4,321 |
|
| 4,282 |
|
| 4,663 |
Work in progress |
|
| 655 |
|
| 594 |
|
| 621 |
|
| $ | 120,512 |
| $ | 108,650 |
| $ | 104,135 |
Accrued liabilities: |
|
|
|
|
|
|
|
|
|
Accrued payroll, benefits and bonuses |
| $ | 21,057 |
| $ | 19,771 |
| $ | 25,177 |
Unearned revenue |
|
| 15,297 |
|
| 10,744 |
|
| 14,643 |
Accrued transaction and property tax |
|
| 11,484 |
|
| 12,249 |
|
| 9,366 |
Gift cards and store credits outstanding |
|
| 9,010 |
|
| 8,777 |
|
| 8,685 |
Accrued lease liabilities |
|
| — |
|
| 4,882 |
|
| 4,619 |
Accrued interest |
|
| 1,796 |
|
| 209 |
|
| 258 |
Other accrued liabilities |
|
| 9,863 |
|
| 10,531 |
|
| 9,069 |
|
| $ | 68,507 |
| $ | 67,163 |
| $ | 71,817 |
On August 18, 2017,Contract balances as a result of transactions with customers primarily consist of trade receivables included in Accounts receivable, net, Unearned revenue included in Accrued liabilities, and Gift cards and store credits outstanding included in Accrued liabilities in the Company entered into a fourth amendment (the “Term Loan Amendment”) to the Credit Agreement datedCompany's Consolidated Balance Sheets provided above. Unearned revenue was $10,744 as of April 6, 2012 (“Senior Secured Term Loan Facility”). The fourth amendment amended the Senior Secured Term Loan Facility to, among other things, (i) extend the maturity date of the loans under the Senior Secured Term Loan Facility to August 18, 2021, (ii) add a maximum leverage covenant of 5.0:1.0 which steps down by 0.25x on JuneMarch 30, of each year commencing on June 30, 2018, (iii) increase the applicable interest rate margin to 7.00%2019, and $9,337 was subsequently recognized into revenue for LIBOR loans and 6.00% for base rate loans, (iv) reduce the aggregate principal amount of the Senior Secured Term Loan Facility to $300,000, (v) increase principal amortization to 2.5% per annum, (vi) require a 3.0% upfront fee on the aggregate principal amount of the Senior Secured Term Loan Facility, and (vii) impose a 1% premium if a voluntary prepayment is made from the proceeds of a repricing transaction within 12 months after August 18, 2017.
On August 18, 2017, the Company also entered into a fourth amendment (the “Revolving Amendment”) to the Revolving Credit Facility, which, among other things, extended the maturity date of the loans under the Revolving Credit Facility to the earlier of (i) August 18, 2022 and (ii) May 18, 2021 if any portion of the Senior Secured Term Loan Facility remains outstanding on such date and the maturity date of the Senior Secured Term Loan Facility is not extended.
In connection with the closing of the Term Loan Amendment and the Revolving Amendment, the Company borrowed a net amount of $20,000 on the Revolving Credit Facility. In addition, the Company recorded a loss on extinguishment of debt of $2,369 in the thirteen weeks ended SeptemberJune 29, 2019. Gift cards and store credits outstanding was $8,777 as of March 30, 2017 associated with the Term Loan Amendment2019, and the Revolving Amendment.
The Company capitalizes certain costs associated with issuance of various debt instruments. These deferred financing costs are amortized to interest expense on a straight-line method, which is materially consistent with the effective interest method, over the terms of the related debt agreements. In$1,083 was subsequently recognized into revenue for the thirteen weeks ended September 30, 2017,June 29, 2019. See Note 10 for disaggregated revenue disclosures.
3. Leases
We conduct all of our U.S. operations from leased facilities that include corporate headquarters, warehouse facilities, and 92 store locations. The corporate headquarters, warehouse facilities, and stores are under operating leases that will expire over the next 1 to 20 years. We also lease computer hardware under operating leases that expire over the next few years. In most cases, management expects that in the normal course of business, leases will be renewed or replaced by other leases. The Company also has finance leases at our Elfa segment which are immaterial.
Lease expense on operating leases is recorded on a straight‑line basis over the term of the lease, commencing on the date the Company capitalized $9,640takes possession of fees associated with the Term Loan Amendment that will be amortized through August 18, 2021leased property and $57 of fees associated with the Revolving Amendment that will be amortized through May 18, 2021is recorded in selling, general and administrative expenses (“SG&A”).
Long-term debtWe consider lease payments that cannot be predicted with reasonable certainty upon lease commencement to be variable lease payments, which are recorded as incurred each period and revolving linesare excluded from our calculation of credit consistlease liabilities. Our variable lease payments include lease payments that are based on a percentage of sales.
Upon lease commencement, we recognize the lease liability measured at the present value of the following:fixed future minimum lease payments. We have elected the practical expedient to not separate lease and non-lease components. Therefore, lease payments included in the measurement of the lease liability include all fixed payments in the lease arrangement. We record a right-of-use asset for an amount equal to the lease liability, increased for any prepaid lease costs and initial direct costs and reduced by any lease incentives. We remeasure the lease liability and right-of-use asset when a change to our future minimum lease payments occurs. Key assumptions and judgments included in the determination of the
11
lease liability include the discount rate applied to present value the future lease payments, and the exercise of renewal options.
|
|
|
|
|
|
|
|
|
| December 30, |
| April 1, |
| December 31, |
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2017 |
| 2016 |
|
Senior secured term loan facility |
| $296,250 |
| $316,760 |
| $317,666 |
|
2014 Elfa term loan facility |
| 2,569 |
| 3,358 |
| 3,634 |
|
Obligations under capital leases |
| 865 |
| 901 |
| 974 |
|
Other loans |
| 49 |
| 119 |
| 140 |
|
Revolving credit facility |
| 25,000 |
| - |
| 20,000 |
|
Total debt |
| 324,733 |
| 321,138 |
| 342,414 |
|
Less current portion |
| (9,465 | ) | (5,445 | ) | (5,390 | ) |
Less deferred financing costs (1) |
| (10,630 | ) | (3,667 | ) | (4,124 | ) |
Total long-term debt |
| $304,638 |
| $312,026 |
| $332,900 |
|
Many of our leases contain renewal options. The option periods are generally not included in the lease term used to measure our lease liabilities and right-of-use assets upon commencement as exercise of the options is not reasonably certain. We remeasure the lease liability and right-of-use asset when we are reasonably certain to exercise a renewal option.
(1)Represents deferred financingDiscount Rate
Our leases do not provide information about the rate implicit in the lease. Therefore, we utilized an incremental borrowing rate to calculate the present value of our future lease obligations. The incremental borrowing rate represents the rate of interest we would have to pay on a collateralized borrowing, for an amount equal to the lease payments, over a similar term and in a similar economic environment.
The components of lease costs for the thirteen weeks ended June 29, 2019 were as follows:
|
|
|
|
Operating lease costs |
| $ | 22,364 |
Variable lease costs |
|
| 472 |
Total lease costs |
| $ | 22,836 |
We do not have sublease income and do not recognize lease assets or liabilities for short-term leases, defined as operating leases with initial terms of less than 12 months. Our short-term lease costs were not material for the thirteen weeks ended June 29, 2019.
Supplemental cash flow information related to our Senior Secured Term Loan Facility, which are presented netleases for the thirteen weeks ended June 29, 2019 were as follows:
|
|
|
|
Cash paid for amounts included in the measurement of operating lease liabilities |
| $ | 22,168 |
Additions to right-of-use assets |
| $ | 15,565 |
Weighted average remaining operating lease term and incremental borrowing rate as of long-term debt in the consolidated balance sheet.June 29, 2019 were as follows:
Weighted average remaining lease term (years) | 7.3 | |||
Weighted average incremental borrowing rate | 8.8 | % |
As of June 29, 2019, future minimum lease payments under our operating lease liabilities were as follows:
|
|
|
|
|
| Operating leases | |
Within 1 year (remaining) |
| $ | 66,973 |
2 years |
|
| 87,235 |
3 years |
|
| 73,111 |
4 years |
|
| 65,601 |
5 years |
|
| 57,573 |
Thereafter |
|
| 181,773 |
Total lease payments |
| $ | 532,266 |
Less amount representing interest |
|
| (146,381) |
Total lease liability |
| $ | 385,885 |
Less current lease liability |
|
| (58,664) |
Total non-current lease liability |
| $ | 327,221 |
Under the Term Loan Amendment, the Company is now required to make quarterly principal repayments of $1,875 through June 20, 2021, with a balloon payment for the remaining balance due on August 18, 2021.
Related Party Debt
On August 18, 2017, Green Credit Investors, L.P. funded4. $20,000 of the $300,000 Senior Secured Term Loan Facility based on the same terms, including interest rates, repayment terms, and collateral, as all other lenders. Green Credit Investors, L.P. is a related party due to its affiliation with LGP, the majority shareholder of the outstanding common stock of the Company. As of December 30, 2017, the principal amount due to Green Credit Investors, L.P. is $11,800, of which $299 is classified as current.
4. Net incomeloss per common share
Basic net incomeloss per common share is computed as net incomeloss divided by the weighted-average number of common shares for the period. Diluted net incomeNet loss per common share – diluted is computed as net incomeloss divided by the weighted-average number of common shares for the period plus common stock equivalents consisting of shares subject to stock-based awards with exercise prices less than or equal to the average market price of the Company’s common stock for the period, to the
12
extent their inclusion would be dilutive. Potentially dilutive securities are excluded from the computation of diluted net incomeloss per common share – diluted if their effect is anti-dilutive.
The following is a reconciliation of net incomeloss and the number of shares used in the basic and diluted net incomeloss per common share calculations:
|
| Thirteen Weeks Ended |
| Thirty-Nine Weeks Ended |
| ||||
|
| December 30, |
| December 31, |
| December 30, |
| December 31, |
|
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
Net income |
| $28,379 |
| $5,092 |
| $19,827 |
| $6,576 |
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
Weighted-average common shares — basic |
| 48,067,754 |
| 47,999,535 |
| 48,057,974 |
| 47,992,652 |
|
Weighted-average common shares — diluted |
| 48,167,882 |
| 48,022,499 |
| 48,128,682 |
| 48,002,495 |
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - basic and diluted |
| $0.59 |
| $0.11 |
| $0.41 |
| $0.14 |
|
|
|
|
|
|
|
|
|
|
|
Antidilutive securities not included: |
|
|
|
|
|
|
|
|
|
Stock options outstanding |
| 3,157,843 |
| 3,001,940 |
| 3,016,359 |
| 2,954,043 |
|
Nonvested restricted stock awards |
| 42,541 |
| - |
| 40,643 |
| - |
|
|
|
|
|
|
|
|
|
| Thirteen Weeks Ended | ||||
|
| June 29, |
| June 30, | ||
|
| 2019 |
| 2018 | ||
Numerator: |
|
|
|
|
|
|
Net loss |
| $ | (4,099) |
| $ | (6,764) |
Denominator: |
|
|
|
|
|
|
Weighted-average common shares—basic and diluted |
|
| 48,231,148 |
|
| 48,138,907 |
|
|
|
|
|
|
|
Net loss per common share—basic and diluted |
| $ | (0.08) |
| $ | (0.14) |
Antidilutive securities not included: |
|
|
|
|
|
|
Stock options outstanding |
|
| 2,497,573 |
|
| 2,598,505 |
Nonvested restricted stock awards |
|
| 197,687 |
|
| 123,001 |
5. Income taxes
The benefit for income taxes in the thirteen weeks ended June 29, 2019 was $1,795 as compared to $3,480 in the thirteen weeks ended June 30, 2018. The effective tax rate for the thirteen weeks ended June 29, 2019 was 30.5%, as compared to 34.0% in the thirteen weeks ended June 30, 2018. During the thirteen weeks ended June 29, 2019, the effective tax rate rose above the U.S. statutory rate of 21% primarily due to the impact of the global intangible low-taxed income (“GILTI”) provision from the Tax Cuts and Jobs Act (the “Tax Cuts and Jobs Act”) was enacted on December 22, 2017. The Tax Act made numerous changes to federal corporate tax law, including reducing thein fiscal 2017 and U.S. federal corporate tax rate from 35% to 21%, requiring companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and allowing for the immediate expensing of qualified property purchases, among others. As of December 30, 2017, the Company had not completed the accounting for the tax effects of enactment of the Tax Act; however, a reasonable estimate of the effects on our existing deferred tax balances has been recorded as a provisional amount in our consolidated financial statements. The Company has not been able to reasonably estimate the one-time transition tax on the earnings of foreign subsidiaries and continues to account for foreign earnings based on the provisions of the tax laws that were in effect immediately prior to the enactment of the Tax Act. Pursuant to Staff Accounting Bulletin No. 118, the Company’s measurement period for implementing the accounting changes required by the Tax Act will close before December 22, 2018 and the Company anticipates completing the accounting under ASC Topic 740, Income Taxes, in a subsequent reporting period within the measurement period.
Provisional amounts for remeasurement of deferred tax balances
Deferred tax balances were remeasured based on the rates at which they are expected to reverse in the future, generally 21% pursuant to the Tax Act. However, the Company is still analyzing certain aspects of the Tax Act and refining the calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. Instate income taxes. During the thirteen weeks ended DecemberJune 30, 2017, a provisional benefit of $24,253 was recognized related to the remeasurement of the Company’s deferred tax balances, which is included as a component of (benefit) provision for income taxes on the consolidated statement of operations.
One-time transition tax on earnings of foreign subsidiaries
The one-time transition tax is based on accumulated earnings and profits (“E&P”) from our 1999 acquisition of Elfa for which U.S. income taxes were previously deferred. The Company has not made sufficient progress on the E&P and foreign tax pool analysis for its foreign subsidiaries to reasonably estimate the effects of the one-time transition tax and, therefore, provisional amounts have not been recorded. The Company does not have all the necessary information available, prepared or analyzed as it relates to how Elfa’s intercompany and restructuring transactions impact E&P and the tax pools. In addition, the foreign cash balance at the end of the fiscal year (March 31, 2018) is unknown. Because the transition tax is based in part on the amount of earnings and profits held in cash and other specified assets as measured as of March 31, 2018, we are unable to determine a reasonable estimate of the transition tax. The Company continued to apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to the enactment of the Tax Act. No deferred taxes have been recorded because the Company has determined these amounts are indefinitely reinvested.
Effective tax rate
In the thirteen weeks ended December 30, 2017, the Company revised its estimated annual effective tax rate to reflect a change in the federal statutory rate from 35% to 21% as a result of the Tax Act. The rate change is administratively effective for fiscal 2017, using a blended rate for the annual period. As a result, the blended statutory rate for fiscal 2017 is 31.5%.
The Company’s effective income tax rate for the thirteen weeks ended December 30, 2017 was -330.1% compared to 39.7% for the thirteen weeks ended December 31, 2016. During the thirteen weeks ended December 30, 2017 the effective tax rate fell below the blended statutory rate of 31.5% primarily due to the estimated impact of the Tax Act, which was primarily driven by the remeasurement of deferred tax balances. During the thirteen weeks ended December 31, 2016, the effective tax rate rose above the U.S. statutory rate of 35% due to earnings mix between domestic and foreign jurisdictions.
The Company’s effective income tax rate for the thirty-nine weeks ended December 30, 2017 was 429.3% compared to 42.5% for the thirty-nine weeks ended December 31, 2016. During the thirty-nine weeks ended December 30, 2017, the effective tax rate rose above the blended statutory rate of 31.5% primarily due to the estimated impactrecognition of the Tax Act, which was primarily driven bya $604 tax benefit for the remeasurement of deferred tax balances. Duringbalances as a result of a change in the thirty-nine weeks ended December 31, 2016, the effectiveSwedish tax rate rose abovewith a pre-tax loss in the statutory ratequarter, the impact of 35% due to earnings mix between domesticthe GILTI provision from the Tax Cuts and foreign jurisdictions coupled with our worldwide netJobs Act, and U.S. state income position.taxes.
6. Commitments and contingencies
In connection with insurance policies and other contracts, the Company has outstanding standby letters of credit totaling $4,023$4,450 as of December 30, 2017.June 29, 2019.
The Company is subject to ordinary litigation and routine reviews by regulatory bodies that are incidental to its business, none of which is expected to have a material adverse effect on the Company’s financial condition, results of operations, or cash flows on an individual basis or in the aggregate.
13
7. Accumulated other comprehensive loss
Accumulated other comprehensive loss (“AOCL”) consists of changes in our foreign currency forward contracts, pension liability adjustment, and foreign currency translation. The components of AOCL, net of tax, are shown below for the thirty-nine thirteen weeks ended December 30, 2017:June 29, 2019:
|
| Foreign |
| Pension |
| Foreign |
| Total |
|
Balance at April 1, 2017 |
| $(155 | ) | $(1,444 | ) | $(21,044 | ) | $(22,643 | ) |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications, net of tax |
| 1,650 |
| (175 | ) | 6,808 |
| 8,283 |
|
Amounts reclassified to earnings, net of tax |
| 37 |
| - |
| - |
| 37 |
|
Net current period other comprehensive income (loss) |
| 1,687 |
| (175 | ) | 6,808 |
| 8,320 |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 30, 2017 |
| $1,532 |
| $(1,619 | ) | $(14,236 | ) | $(14,323 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign |
|
|
|
|
|
|
|
|
| |
|
| currency |
| Pension |
| Foreign |
|
|
| |||
|
| hedge |
| liability |
| currency |
|
|
| |||
|
| instruments |
| adjustment |
| translation |
| Total | ||||
Balance at March 30, 2019 |
| $ | (967) |
| $ | (1,833) |
| $ | (23,332) |
| $ | (26,132) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss before reclassifications, net of tax |
|
| (250) |
|
| (2) |
|
| 333 |
|
| 81 |
Amounts reclassified to earnings, net of tax |
|
| 122 |
|
| — |
|
| — |
|
| 122 |
Net current period other comprehensive loss |
|
| (128) |
|
| (2) |
|
| 333 |
|
| 203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 29, 2019 |
| $ | (1,095) |
| $ | (1,835) |
| $ | (22,999) |
| $ | (25,929) |
Amounts reclassified from AOCL to earnings for the foreign currency forward contracts category are generally included in cost of sales in the Company’s consolidated statements of operations. For a description of the Company’s use of foreign currency forward contracts, refer to Note 8.8.
8. Foreign currency forward contracts
The Company’s international operations and purchases of inventory products from foreign suppliers are subject to certain opportunities and risks, including foreign currency fluctuations. In the TCS segment, we utilize foreign currency forward contracts in Swedish krona to stabilize our retail gross margins and to protect our domestic operations from downward currency exposure by hedging purchases of inventory from our wholly-owned subsidiary, Elfa. Forward contracts in the TCS segment are designated as cash flow hedges, as defined by ASC 815. In the Elfa segment, we utilize foreign currency forward contracts to hedge purchases, primarily of raw materials, that are transacted in currencies other than Swedish krona, which is the functional currency of Elfa. Forward contracts in the Elfa segment are economic hedges and are not designated as cash flow hedges as defined by ASC 815.
During the thirty-ninethirteen weeks ended DecemberJune 29, 2019 and June 30, 2017 and December 31, 2016,2018, the TCS segment used forward contracts for 100% and 75% of inventory purchases in Swedish krona, respectively. During the thirty-nine weeks ended December 30, 2017 and December 31, 2016, the Elfa segment used forward contracts to purchase U.S. dollars in the amount of $1,648 and $3,195, which represented 27% and 61% of the Elfa segment’s U.S. dollar purchases, respectively.krona. Generally, the Company’s foreign currency forward contracts have terms from 1 to 12 months and require the Company to exchange currencies at agreed-upon rates at settlement.
The counterparties to the contracts consist of a limited number of major domestic and international financial institutions. The Company does not hold or enter into financial instruments for trading or speculative purposes. The Company records its foreign currency forward contracts on a gross basis and generally does not require collateral from these counterparties because it does not expect any losses from credit exposure.
The Company records all foreign currency forward contracts on its consolidated balance sheet at fair value. The Company accounts for its foreign currency hedging instruments in the TCS segment as cash flow hedges, as defined. Changes in the fair value of the foreign currency hedging instruments that are considered to be effective, as defined, are recorded in other comprehensive income (loss) until the hedged item (inventory) is sold to the customer, at which
time the deferred gain or loss is recognized through cost of sales. Any portion of a change in the foreign currency hedge instrument’s fair value that is considered to be ineffective, as defined, or that the Company has elected to exclude from its measurement of effectiveness, is immediately recorded in earnings as cost of sales. The Company assessed the effectiveness of the foreign currency hedge instruments and determined the foreign currency hedge instruments were highly effective during the thirty-ninethirteen weeks ended DecemberJune 29, 2019 and June 30, 2017 and December 31, 2016.2018. Forward contracts not designated as hedges in the Elfa segment are adjusted to fair value as selling, general, and administrative expensesSG&A on the consolidated statements of operations. Duringoperations; however, during the thirty-ninethirteen weeks ended December 30, 2017,June 29, 2019, the Company recognized a net loss of $182did not recognize any amount associated with the change in fair value of forward contracts not designated as hedging instruments.instruments, as the Company had none of these instruments outstanding.
14
The Company had a $1,532 gain$1,095 loss in accumulated other comprehensive loss related to foreign currency hedge instruments at December 30, 2017. The entire $1,532June 29, 2019, of which $405 represents an unrealized gainloss for settled foreign currency hedge instruments related to inventory on hand as of December 30, 2017.June 29, 2019. The Company expects the unrealized gainloss of $1,532,$405, net of taxes, to be reclassified into earnings over the next 12 months as the underlying inventory is sold to the end customer.
The change in fair value of the Company’s foreign currency hedge instruments that qualify as cash flow hedges and are included in accumulated other comprehensive loss, net of taxes, are presented in Note 7 of these financial statements.
9. Fair value measurements
Under GAAP, the Company is required to a) measure certain assets and liabilities at fair value or b) disclose the fair values of certain assets and liabilities recorded at cost. Accounting standards define fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. Fair value is calculated assuming the transaction occurs in the principal or most advantageous market for the asset or liability and includes consideration of non-performance risk and credit risk of both parties. Accounting standards pertaining to fair value establish a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value. These tiers include:
| · | Level 1—Valuation inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. |
| · | Level 2—Valuation inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| · | Level 3—Valuation inputs are unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are determined using model-based techniques that include option pricing models, discounted cash flow models and similar techniques. |
As of DecemberJune 29, 2019, March 30, 2017, April 1, 20172019 and December 31, 2016,June 30, 2018, the Company held certain items that are required to be measured at fair value on a recurring basis. These included the nonqualified retirement plan, and foreign currency forward contracts. The nonqualified retirement planwhich consists of investments purchased by employee contributions to retirement savings accounts. The Company’s foreign currency hedging instruments consist of over-the-counter (OTC) contracts, which are not traded on a public exchange. See Note 8 for further information on the Company’s hedging activities.
The fair valuesvalue amount of the nonqualified retirement plan is measured at fair value using the net asset value per share practical expedient, and foreign currency forward contracts are determined based ontherefore, is not classified in the market approach which utilizes inputs that are readily available in public markets or can be derived from information available in publicly quoted markets for comparable assets. Therefore, the Company has categorized
these items as Level 2.fair value hierarchy. The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values. The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of contracts it holds.
The following items are measured at fair value on a recurring basis, subject to the disclosure requirements of ASC 820, Fair Value Measurements:
|
|
|
|
|
| December 30, |
| April 1, |
| December 31, |
|
Description |
|
|
| Balance Sheet Location |
| 2017 |
| 2017 |
| 2016 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
Nonqualified retirement plan (1) |
| N/A |
| Other current assets |
| $5,782 |
| $5,092 |
| $4,735 |
|
Foreign currency forward contracts |
| Level 2 |
| Other current assets |
| - |
| 841 |
| 274 |
|
Total assets |
|
|
|
|
| $5,782 |
| $5,933 |
| $5,009 |
|
(1)The fair value amount of the nonqualified retirement plan is measured at fair value using the net asset value per share practical expedient, and therefore, is not classified in the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 29, |
| March 30, |
| June 30, | |||
Description |
|
|
| Balance Sheet Location |
| 2019 |
| 2019 |
| 2018 | |||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified retirement plan |
| N/A |
| Other current assets |
| $ | 5,673 |
| $ | 5,810 |
| $ | 5,999 |
Total assets |
|
|
|
|
| $ | 5,673 |
| $ | 5,810 |
| $ | 5,999 |
The fair value of long-term debt was estimated using quoted prices as well as recent transactions for similar types of borrowing arrangements (level(Level 2 valuations). As of DecemberJune 29, 2019, March 30, 2017, April 1, 20172019 and December 31, 2016,June 30, 2018, the estimated fair value of the Company’s long-term debt, including current maturities, was $313,068, $295,005,$295,942, $274,753, and $308,463,$312,876, respectively.
15
10. Segment reporting
The Company’s reportable segments were determined on the same basis as how management evaluates performance internally by the Chief Operating Decision Maker (“CODM”). The Company has determined that the Chief Executive Officer is the CODM and the Company’s two reportable segments consist of TCS and Elfa. The TCS segment includes the Company’s retail stores, website and call center, as well as the installation and organization services business.
The Elfa segment includes the manufacturing business that produces the elfa® brand products that are sold domestically exclusively through the TCS segment, as well as on a wholesale basis in approximately 30 countries around the world with a concentration in the Nordic region of Europe. The intersegment sales in the Elfa column represent elfa® product sales to the TCS segment. These sales and the related gross margin on merchandise recorded in TCS inventory balances at the end of the period are eliminated for consolidation purposes in the Eliminations column. The net sales to third parties in the Elfa column represent sales to customers outside of the United States.
The Company has determined that adjusted earnings before interest, tax, depreciation, and amortization (“Adjusted EBITDA”) is the profit or loss measure that the CODM uses to make resource allocation decisions and evaluate segment performance.
Adjusted EBITDA assists management in comparing our performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect our core operations and, therefore, are not included in measuring segment performance. Adjusted EBITDA is calculated in accordance with the Senior Secured Term Loan Facility and the Revolving Credit Facility and we define Adjusted EBITDA as net income before interest, taxes, depreciation and amortization, certain non cashnon-cash items, and other adjustments that we do not consider in our evaluation of ongoing operating performance from period to period.
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended December 30, 2017 |
| TCS |
| Elfa |
| Eliminations |
| Total |
|
Net sales to third parties |
| $203,881 |
| $19,105 |
| $- |
| $222,986 |
|
Intersegment sales |
| - |
| 23,495 |
| (23,495 | ) | - |
|
Adjusted EBITDA |
| 22,550 |
| 6,374 |
| (3,363 | ) | 25,561 |
|
Interest expense, net |
| 7,232 |
| 68 |
| - |
| 7,300 |
|
Assets (1) |
| 673,489 |
| 116,779 |
| (5,869 | ) | 784,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended December 31, 2016 |
| TCS |
| Elfa |
| Eliminations |
| Total |
| ||||||||||||
Thirteen Weeks Ended June 29, 2019 |
| TCS |
| Elfa |
| Eliminations |
| Total | |||||||||||||
Net sales to third parties |
| $199,087 |
| $17,293 |
| $- |
| $216,380 |
|
| $ | 195,076 |
| $ | 14,444 |
| $ | — |
| $ | 209,520 |
Intersegment sales |
| - |
| 20,160 |
| (20,160 | ) | - |
|
|
| — |
|
| 11,550 |
|
| (11,550) |
|
| — |
Adjusted EBITDA |
| 22,333 |
| 4,968 |
| (1,983 | ) | 25,318 |
|
|
| 10,234 |
|
| 2,088 |
|
| (1,679) |
|
| 10,643 |
Interest expense, net |
| 4,080 |
| 39 |
| - |
| 4,119 |
|
|
| 5,614 |
|
| 95 |
|
| — |
|
| 5,709 |
Assets (1) |
| 680,287 |
| 105,008 |
| (5,181 | ) | 780,114 |
|
|
| 1,018,984 |
|
| 107,678 |
|
| (5,142) |
|
| 1,121,520 |
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended December 30, 2017 |
| TCS |
| Elfa |
| Eliminations |
| Total |
|
Net sales to third parties |
| $573,261 |
| $51,203 |
| $- |
| $624,464 |
|
Intersegment sales |
| - |
| 46,036 |
| (46,036 | ) | - |
|
Adjusted EBITDA |
| 51,760 |
| 10,965 |
| (4,218 | ) | 58,507 |
|
Interest expense, net |
| 17,189 |
| 209 |
| - |
| 17,398 |
|
Assets (1) |
| 673,489 |
| 116,779 |
| (5,869 | ) | 784,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended December 31, 2016 |
| TCS |
| Elfa |
| Eliminations |
| Total |
| ||||||||||||
Thirteen Weeks Ended June 30, 2018 |
| TCS |
| Elfa |
| Eliminations |
| Total | |||||||||||||
Net sales to third parties |
| $549,423 |
| $49,465 |
| $- |
| $598,888 |
|
| $ | 180,082 |
| $ | 15,741 |
| $ | — |
| $ | 195,823 |
Intersegment sales |
| - |
| 41,982 |
| (41,982 | ) | - |
|
|
| — |
|
| 10,395 |
|
| (10,395) |
|
| — |
Adjusted EBITDA |
| 53,485 |
| 9,454 |
| (3,289 | ) | 59,650 |
|
|
| 10,103 |
|
| 1,599 |
|
| 689 |
|
| 12,391 |
Interest expense, net |
| 12,283 |
| 151 |
| - |
| 12,434 |
|
|
| 7,845 |
|
| 63 |
|
| — |
|
| 7,908 |
Assets (1) |
| 680,287 |
| 105,008 |
| (5,181 | ) | 780,114 |
|
|
| 649,190 |
|
| 106,446 |
|
| (3,273) |
|
| 752,363 |
(1) | Tangible assets in the Elfa column are located outside of the United States. |
(1)Tangible assets in the Elfa column are located outside
16
(2)The TCS segment includes a net benefit of $3.9 million related to amended and restated employment agreements entered into with key executives during the first quarter of fiscal 2016, leading to a reversal of accrued deferred compensation associated with the original employment agreements.
A reconciliation of loss before taxes to Adjusted EBITDA by segment to (loss) income before taxes is set forth below:
|
| Thirteen Weeks Ended |
| Thirty-Nine Weeks Ended |
| ||||
|
| December 30, |
| December 31, |
| December 30, |
| December 31, |
|
Adjusted EBITDA by segment: |
|
|
|
|
|
|
|
|
|
TCS |
| $22,550 |
| $22,333 |
| $51,760 |
| $53,485 |
|
Elfa |
| 6,374 |
| 4,968 |
| 10,965 |
| 9,454 |
|
Eliminations |
| (3,363 | ) | (1,983 | ) | (4,218 | ) | (3,289 | ) |
Total Adjusted EBITDA |
| 25,561 |
| 25,318 |
| 58,507 |
| 59,650 |
|
Depreciation and amortization |
| (9,477 | ) | (9,236 | ) | (28,524 | ) | (28,061 | ) |
Interest expense, net |
| (7,300 | ) | (4,119 | ) | (17,398 | ) | (12,434 | ) |
Pre-opening costs (a) |
| (1,872 | ) | (2,918 | ) | (4,676 | ) | (6,558 | ) |
Non-cash rent (b) |
| 714 |
| 298 |
| 1,451 |
| 970 |
|
Stock-based compensation (c) |
| (585 | ) | (599 | ) | (1,589 | ) | (1,355 | ) |
Loss on extinguishment of debt (d) |
| - |
| - |
| (2,369 | ) | - |
|
Foreign exchange gains (losses) (e) |
| 360 |
| (53 | ) | 306 |
| 211 |
|
Optimization Plan implementation charges (f) |
| (422 | ) | - |
| (10,742 | ) | - |
|
Elfa manufacturing facility closure (g) |
| (335 | ) | - |
| (852 | ) | - |
|
Other adjustments (h) |
| (45 | ) | (249 | ) | (135 | ) | (996 | ) |
Income (loss) before taxes |
| $6,599 |
| $8,442 |
| $(6,021 | ) | $11,427 |
|
|
|
|
|
|
|
|
|
|
| Thirteen Weeks Ended | |||
|
| June 29, |
| June 30, | ||
|
| 2019 |
| 2018 | ||
Loss before taxes |
| $ | (5,894) |
| $ | (10,244) |
Add: |
|
|
|
|
|
|
Depreciation and amortization |
|
| 9,706 |
|
| 9,337 |
Interest expense, net |
|
| 5,709 |
|
| 7,908 |
Pre-opening costs (a) |
|
| 477 |
|
| 346 |
Non-cash lease expense (b) |
|
| (64) |
|
| (637) |
Stock-based compensation (c) |
|
| 811 |
|
| 586 |
Foreign exchange (gains) losses (d) |
|
| (75) |
|
| 38 |
Optimization Plan implementation charges (e) |
|
| — |
|
| 4,864 |
Other adjustments (f) |
|
| (27) |
|
| 193 |
Adjusted EBITDA |
| $ | 10,643 |
| $ | 12,391 |
(a) | Non-capital expenditures associated with opening new stores and relocating stores, including marketing expenses, travel and relocation costs, and training costs. We adjust for these costs to facilitate comparisons of our performance from period to period. |
| (b) | Reflects the extent to which our annual GAAP operating lease expense has been above or below our cash operating lease payments. The amount varies depending on the average age of our lease portfolio (weighted for size), as our GAAP operating lease expense on younger leases typically exceeds our cash operating lease payments, while our GAAP operating lease expense on older leases is typically less than our cash operating lease payments. |
| (c) | Non-cash charges related to stock-based compensation programs, which vary from period to period depending on volume and vesting timing of awards. We adjust for these charges to facilitate comparisons from period to period. |
| (d) | Realized foreign exchange transactional gains/losses our management does not consider in our evaluation of our ongoing operations. |
| (e) | Charges incurred to implement our four-part optimization plan to drive improved sales and profitability, launched during fiscal 2017 (the “Optimization Plan”), which include certain consulting costs recorded in SG&A in the first quarter of fiscal 2018, which we do not consider in our evaluation of ongoing performance. |
(e) Realized foreign exchange transactional gains/losses our management does not consider in our evaluation of our ongoing operations.
(f) Charges incurred to implement our Optimization Plan, which include certain consulting costs recorded in selling, general and administrative expenses, cash severance payments associated with the elimination of certain full-time positions at the TCS segment recorded in other expenses, and cash severance payments associated with organizational realignment at the Elfa segment recorded in other expenses, which we do not consider in our evaluation of ongoing performance.
(g) Charges related to the closure of an Elfa manufacturing facility in Lahti, Finland in December 2017, recorded in other expenses, which we do not consider in our evaluation of our ongoing performance.
(h) Other adjustments include amounts our management does not consider in our evaluation of our ongoing
operations, including certain severance and other charges.
11. Optimization Plan
On May 23, 2017, the Company announced a four-part plan designed to optimize its consolidated business and drive improved sales and profitability (the “Optimization Plan”), which included sales initiatives, certain full-time position eliminations at TCS, organizational realignment at Elfa and ongoing savings and efficiency efforts.
In the thirteen weeks and thirty-nine weeks ended December 30, 2017, the Company incurred the following charges related to the implementation of the Optimization Plan:
|
|
|
|
Thirteen |
| Thirty-Nine |
|
|
|
|
|
|
|
|
|
|
| Income Statement Location |
| December 30, |
| December 30, |
|
Consulting fees and other costs |
| Selling, general & administrative |
| $6 |
| $6,686 |
|
Severance - full-time position eliminations at TCS |
| Other expenses |
| - |
| 1,836 |
|
Severance - organizational realignment at Elfa |
| Other expenses |
| 416 |
| 2,220 |
|
Total Optimization Plan charges |
|
|
| $422 |
| $10,742 |
|
(f) | Other adjustments include amounts our management does not consider in our evaluation of our ongoing operations, including certain severance and other charges. |
Certain aspects of the Optimization Plan meet the definition of exit or disposal costs as defined in the Accounting Standards Codification (“ASC”) Topic 420, Exit or Disposal Cost Obligations. The following table summarizes the exit or disposal activities during the thirty-nine weeks ended December 30, 2017:
| |||
| |||
|
| ||
|
| ||
|
|
| |
|
| ||
|
| ||
|
|
| |
|
| ||
|
| ||
|
|
| |
|
| ||
| |||
|
| ||
|
|
The balance of $113 as of December 30, 2017 is recorded in the Accrued liabilities line item in the Consolidated Balance Sheets. The Company does not expect future severance costs to be incurred related to full-time position eliminations at TCS as the actions were completed during the first quarter of fiscal 2017.
12. Elfa manufacturing facility closure
During the thirteen weeks ended December 30, 2017, the Company closed the Elfa manufacturing facility in Lahti, Finland. The Company recorded $335 and $852 as other expenses in connection with the closure of the manufacturing facility in the thirteen weeks ended December 30, 2017 and the thirty-nine weeks ended December 30, 2017, respectively, which includes severance costs, charges for inventory obsolescence and accelerated depreciation on machinery and equipment.
13.11. Stock-based compensation
On September 12, 2017,June 1, 2019, the Company granted time-based and performance-based restricted stock awards under the Company’s shareholders approved The Container Store Group Inc. Amended and Restated 2013 Incentive Award Plan (the “Amendedto certain officers and Restated Plan”), which previously had been approved byemployees of the Company’s Board of Directors.Company. The Amended and Restated Plan (i) increases thetotal number of restricted shares granted was 605,927 with a grant-date fair value of common$7.03 per share. The time-based restricted stock available for issuance under such plan from 3,616,570 shares to 11,116,570 shares; (ii) is intended to allow awards under the Amendedwill vest over 3 years. The performance-based restricted stock awards vest based on achievement of fiscal 2019 performance targets and Restated Plan to continue to qualify as tax-deductible performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended,are also subject to anticipated changes resulting from the Tax Act as described below; and (iii) makes certain minor technical changes to the terms of the Amended and Restated Plan.time-based vesting requirements over 3 years.
PursuantUnrecognized compensation expense related to the Tax Act, the exception for performance-based compensation has been repealed, effective for tax years beginning after December 31, 2017, and, therefore, compensation previously intendedoutstanding restricted stock awards to employees as of June 29, 2019 is expected to be performance-based may not be deductible unless it qualifies for limited transition relief applicable to certain amounts payable pursuant to$4,900, and recognized over a written binding contract thatweighted average period of 1.8 years. As of June 29, 2019, the total number of nonvested restricted stock awards was in effect on November 2, 2017.950,013.
17
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary note regarding forward-looking statements
This report, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements included in this Quarterly Report, including without limitation statements regarding expectations for our business, anticipated financial performance and liquidity, anticipated capital expenditures and interest expense, and expectations regarding our second distribution center, are only predictions and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These include, but are not limited to: a decline in the health of the economy and the purchase of discretionary items; risks related to new store openings;a security breach or cyber-attack of our inabilitywebsite or information technology systems, and other damage to source and marketsuch systems; effects of competition on our products to meet customer preferences or inability to offer customers an aesthetically pleasing shopping environment;business; the risk that our operating and financial performance in a given period will not meet the guidance we provided to the public; the risk that significant business initiatives may not be successful; our inability to source and market our products to meet customer preferences or inability to offer customers an aesthetically pleasing shopping environment; risks related to our indebtedness; our inability to effectively manage online sales; our dependence on a single distribution center for all of our stores; the vulnerability of our facilities and systemsrisks related to natural disasters and other unexpected events;opening a second distribution center; risks related to our reliance on independent third-party transportation providers for substantially all of our product shipments; risks associated with our dependence on foreign imports; material damage to or interruptions in our information technology systems; our inability to lease space on favorable terms; the vulnerability of our facilities and systems to natural disasters and other unexpected events; our reliance on third-party web service providers; our failure to successfully anticipate consumer demand and manage inventory commensurate with demand; our ability to control increasing costs, including fluctuations in currency exchange rates and rising health care and labor costs; risks related to new store openings; our dependence on our brand image and any inability to protect our brand; our failure to successfully anticipate consumer demand and manage inventory commensurate with demand; our failure to effectively manage our growth; our inability to lease space on favorable terms; fluctuations in currency exchange rates; risks related to a security breach or cyber-attack of our website or information technology systems, and other damage to such systems; our inability to effectively manage online sales; effects of competition on our business; risks related to our inability to obtain capital on satisfactory terms or at all; disruptions in the global financial markets leading to difficulty in borrowing sufficient amounts of capital to finance the carrying costs of inventory to pay for capital expenditures and operating costs; our inability to obtain merchandise from our vendors on a timely basis and at competitive prices; the risk that our vendors may sell their products to our competitors; our dependence on key executive management, and the transition in our executive leadership; our inability to find, train and retain key personnel; labor activities and unrest; rising health care and labor costs; risks associated with our dependence on foreign imports; risks related to violations of anti-bribery and anti-kickback laws; risks related to our indebtedness; risks related to our fixed lease obligations; material damage to or interruptions in our information technology systems; risks related to litigation; product recalls and/or product liability and changes in product safety and consumer protection laws; changes in statutory, regulatory, accounting and other legal requirements; risks related to changes in estimates or projections used to assess the fair value of our intangible assets; fluctuations in our tax obligations and effective tax rate and realization of our deferred tax assets,assets; impacts to our business as a result of the Tax Cuts and Jobs Act; seasonal fluctuations in our operating results; material disruptions in one of our Elfa manufacturing facilities; our inability to protect our intellectual property rights and claims that we have infringed third parties’ intellectual property rights; risks related to our status as a controlled company; significant fluctuations in the price of our common stock; substantial future sales of our common stock, or the perception that such sales may occur, which could depress the price of our common stock; risks related to being a public company; anti-takeover provisions in our governing documents, which could delay or prevent a change in control; reduced disclosure requirements applicable to emerging growth companies, which could make our stock less attractive to investors; and our failure to establish and maintain effective internal controls. Other important risk factors that could affect the outcome of the events set forth in these statements and that could affect our operating results and financial condition are described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended April 1, 2017,March 30, 2019, filed with the Securities and Exchange Commission (the “SEC”) on June 1, 2017.May 30, 2019.
We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this report. Because forward-looking statements are inherently
18
inherently subject to risks and uncertainties, you should not rely on these forward-looking statements as predictions of future events. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein after the date of this report, whether as a result of any new information, future events or otherwise.
Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to the “Company,” “we,” “us,” and “our” refer to The Container Store Group, Inc. and, where appropriate, its subsidiaries.
We follow a 4-4-5 fiscal calendar, whereby each fiscal quarter consists of thirteen weeks grouped into two four-week “months” and one five-week “month”, and our fiscal year is the 52- or 53-week period ending on the Saturday closest to March 31. Fiscal 20172019 ends on March 31,28, 2020 and fiscal 2018 fiscal 2016 ended on April 1, 2017, and fiscal 2015 ended on February 27, 2016.March 30, 2019. The thirdfirst quarter of fiscal 20172019 ended on December 30, 2017June 29, 2019 and the thirdfirst quarter of fiscal 20162018 ended on December 31, 2016,June 30, 2018, and both included thirteen weeks.
Overview
The Container Store® is the original and leading specialty retailer of storage and organization products and solutions in the United States and the only national retailer solely devoted to the category. We provide a collection of creative, multifunctional and customizable storage and organization solutions that are sold in our stores and online through a high-service, differentiated shopping experience. We feature The Container Store Custom Closets consisting of our elfa® Classic, elfa® Décor, Avera™ and Laren™ closet lines. Our vision is to be a beloved brand and the first choice for customized organization solutions and services. Our customers are highly educated, and very busy – from college students to empty nesters.and primarily homeowners with a higher than average household income. We service them with storage and organization solutions tothat help them accomplish projects, that save themmaximize their space, and time and ultimately improvemake the qualitymost of their lives. We believe an organized life is a happy life.home.
Our operations consist of two operating segments:
· The Container Store (“TCS”), which consists of our retail stores, website and call center (which includes business sales), as well as our installation and organizational services business. As of December 30, 2017,June 29, 2019, we operated 9092 stores with an average size of approximately 25,000 square feet (19,000 selling square feet) in 3233 states and the District of Columbia. We also offer our customers their choice of how to shop—in-store, online or through our in-home services. Our stores receive substantially all of our products directly to customers, including business-to-business customers, through our website, responsive mobile site, and call center. Our stores receive all products directly from our distribution center co-located with our corporate headquarters and call center in Coppell, Texas.Texas and we are currently in the process of opening a second distribution center in Aberdeen, Maryland, which is expected to be fully operational in late fiscal 2019.
· Elfa, The Container Store, Inc.’s wholly-owned Swedish subsidiary, Elfa International AB (“Elfa”), which designs and manufactures component-based shelving and drawer systems and made-to-measure sliding doors. Elfa was founded in 1948 and is headquartered in Malmö, Sweden. Elfa’s shelving and drawer systems are customizable for any area of the home, including closets, kitchens, offices and garages. Elfa operates three manufacturing facilities with two located in Sweden and one in Poland. The Container Store began selling elfa®elfa® products in 1978 and acquired Elfa in 1999. Today our TCS segment is the exclusive distributor of elfa®elfa® products in the U.S. Elfa also sells its products on a wholesale basis to various retailers in approximately 30 countries around the world, with a concentration in the Nordic region of Europe.
Optimization Plan
As previously announced on May 23, 2017, the Company launched a four-part optimization plan to drive improved sales and profitability (the “Optimization Plan”). This plan includes sales initiatives, certain full-time position eliminations at TCS that were concluded in the first fiscal quarter, organizational realignment at Elfa and ongoing savings and efficiency efforts. In fiscal 2016, the Company’s savings program was primarily focused within selling, general and administrative expenses. However, as part of the Optimization Plan, the Company also intends to focus on savings and efficiency efforts within cost of sales, in addition to selling, general and administrative expenses.
The Company expects to incur pre-tax charges associated with the implementation of the Optimization Plan of approximately $11 million in fiscal 2017. The expected annualized pre-tax savings associated with the Optimization Plan continue to be approximately $20 million, of which approximately $12 to $14 million is now expected to be realized in fiscal 2017.
Note on Dollar Amounts
All dollar amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are in thousands, except per share amounts and unless otherwise stated.
19
Results of Operations
The following data represents the amounts shown in our unaudited consolidated statements of operations expressed in dollars and as a percentage of net sales and operating data for the periods presented. For segment data, see Note 10 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
|
|
|
|
|
|
|
|
| Thirteen Weeks Ended | ||||
|
| June 29, |
| June 30, | ||
|
| 2019 |
| 2018 | ||
Net sales |
| $ | 209,520 |
| $ | 195,823 |
Cost of sales (excluding depreciation and amortization) |
|
| 89,713 |
|
| 81,052 |
Gross profit |
|
| 119,807 |
|
| 114,771 |
Selling, general, and administrative expenses (excluding depreciation and amortization) |
|
| 109,029 |
|
| 106,605 |
Stock-based compensation |
|
| 811 |
|
| 586 |
Pre-opening costs |
|
| 477 |
|
| 346 |
Depreciation and amortization |
|
| 9,706 |
|
| 9,337 |
Other (income) expenses |
|
| (27) |
|
| 193 |
(Gain) loss on disposal of assets |
|
| (4) |
|
| 40 |
Loss from operations |
|
| (185) |
|
| (2,336) |
Interest expense, net |
|
| 5,709 |
|
| 7,908 |
Loss before taxes |
|
| (5,894) |
|
| (10,244) |
Benefit for income taxes |
|
| (1,795) |
|
| (3,480) |
Net loss |
| $ | (4,099) |
| $ | (6,764) |
|
| Thirteen Weeks Ended |
| Thirty-Nine Weeks Ended | |||||
|
| December 30, |
| December 31, |
| December 30, |
| December 31, |
|
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
Net sales |
| $222,986 |
| $216,380 |
| $624,464 |
| $598,888 |
|
Cost of sales (excluding depreciation and amortization) |
| 92,425 |
| 90,678 |
| 263,919 |
| 250,136 |
|
Gross profit |
| 130,561 |
| 125,702 |
| 360,545 |
| 348,752 |
|
Selling, general, and administrative expenses (excluding depreciation and amortization) |
| 103,894 |
| 100,206 |
| 306,866 |
| 288,037 |
|
Stock-based compensation |
| 585 |
| 599 |
| 1,589 |
| 1,355 |
|
Pre-opening costs |
| 1,872 |
| 2,918 |
| 4,676 |
| 6,558 |
|
Depreciation and amortization |
| 9,477 |
| 9,236 |
| 28,524 |
| 28,061 |
|
Other expenses |
| 751 |
| 182 |
| 4,908 |
| 839 |
|
Loss on disposal of assets |
| 83 |
| - |
| 236 |
| 41 |
|
Income from operations |
| 13,899 |
| 12,561 |
| 13,746 |
| 23,861 |
|
Interest expense |
| 7,300 |
| 4,119 |
| 17,398 |
| 12,434 |
|
Loss on extinguishment of debt |
| - |
| - |
| 2,369 |
| - |
|
Income (loss) before taxes |
| 6,599 |
| 8,442 |
| (6,021 | ) | 11,427 |
|
(Benefit) provision for income taxes |
| (21,780 | ) | 3,350 |
| (25,848 | ) | 4,851 |
|
Net income |
| $28,379 |
| $5,092 |
| $19,827 |
| $6,576 |
|
|
|
|
|
|
|
|
|
|
| Thirteen Weeks Ended |
| ||||
|
| June 29, |
| June 30, |
| ||
|
| 2019 |
| 2018 |
| ||
Percentage of net sales: |
|
|
|
|
|
|
|
Net sales |
|
| 100.0 | % |
| 100.0 | % |
Cost of sales (excluding depreciation and amortization) |
|
| 42.8 | % |
| 41.4 | % |
Gross profit |
|
| 57.2 | % |
| 58.6 | % |
Selling, general, and administrative expenses (excluding depreciation and amortization) |
|
| 52.0 | % |
| 54.4 | % |
Stock‑based compensation |
|
| 0.4 | % |
| 0.3 | % |
Pre‑opening costs |
|
| 0.2 | % |
| 0.2 | % |
Depreciation and amortization |
|
| 4.6 | % |
| 4.8 | % |
Other (income) expenses |
|
| (0.0) | % |
| 0.1 | % |
(Gain) loss on disposal of assets |
|
| (0.0) | % |
| 0.0 | % |
Loss from operations |
|
| (0.1) | % |
| (1.2) | % |
Interest expense, net |
|
| 2.7 | % |
| 4.0 | % |
Loss before taxes |
|
| (2.8) | % |
| (5.2) | % |
Benefit for income taxes |
|
| (0.9) | % |
| (1.8) | % |
Net loss |
|
| (2.0) | % |
| (3.5) | % |
Operating data: |
|
|
|
|
|
|
|
Comparable store sales growth for the period (1) |
|
| 7.8 | % |
| 4.7 | % |
Number of stores open at end of period |
|
| 92 |
|
| 91 |
|
Non‑GAAP measures (2): |
|
|
|
|
|
|
|
Adjusted EBITDA (3) |
| $ | 10,643 |
| $ | 12,391 |
|
Adjusted net loss (4) |
| $ | (4,099) |
| $ | (4,012) |
|
Adjusted net loss per common share—diluted (4) |
| $ | (0.08) |
| $ | (0.08) |
|
(1) | A store is included in the comparable store sales calculation on the first day of the sixteenth full fiscal month following the store’s opening. Comparable store sales reflect the point at which merchandise and service orders are fulfilled and delivered to customers, excluding shipping and delivery, and are net of discounts and returns. When a store is relocated, we continue to consider net sales from that store to be comparable store sales. A store temporarily closed for more than seven days is not considered comparable in the fiscal month it is closed. The store then becomes comparable on the first day of the following fiscal month in which it reopens. Net sales from our website and call center (which includes business sales) are also included in calculations of comparable store sales. |
20
Table of Contents Thirteen Weeks Ended Thirty-Nine Weeks Ended December 30, December 31, December 30, December 31, 2017 2016 2017 2016 Percentage of net sales: Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales (excluding depreciation and amortization) 41.4% 41.9% 42.3% 41.8% Gross profit 58.6% 58.1% 57.7% 58.2% Selling, general and administrative expenses (excluding depreciation and amortization) 46.6% 46.3% 49.1% 48.1% Stock-based compensation 0.3% 0.3% 0.3% 0.2% Pre-opening costs 0.8% 1.3% 0.7% 1.1% Depreciation and amortization 4.3% 4.3% 4.6% 4.7% Other expenses 0.3% 0.1% 0.8% 0.1% Loss on disposal of assets 0.0% 0.0% 0.0% 0.0% Income from operations 6.2% 5.8% 2.2% 4.0% Interest expense 3.3% 1.9% 2.8% 2.1% Loss on extinguishment of debt 0.0% 0.0% 0.4% 0.0% Income (loss) before taxes 3.0% 3.9% (1.0%) 1.9% (Benefit) provision for income taxes (9.8%) 1.5% (4.1%) 0.8% Net income 12.7% 2.4% 3.2% 1.1% Operating data: Comparable store sales(1) (0.2%) (3.9%) 0.2% (3.3%) Number of stores open at end of period 90 86 90 86 Non-GAAP measures(2): Adjusted EBITDA(3) $25,561 $25,318 $58,507 $59,650 Adjusted net income (4) $5,083 $5,228 $5,153 $4,652 Adjusted net income per diluted share (4) $0.11 $0.11 $0.11 $0.10
(1) A store is included in the comparable store sales calculation on the first day of the sixteenth full fiscal month following the store’s opening. Comparable store sales reflect the point at which merchandise and service orders are fulfilled and delivered to customers, excluding shipping and delivery, and are net of discounts and returns. When a store is relocated, we continue to consider net sales from that store to be comparable store sales. Website, call center and business-to-business net sales are also included in calculations of comparable store sales.
(2) We have presented EBITDA, Adjusted EBITDA, adjusted net income, and adjusted net income per diluted share as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. These non-GAAP measures should not be considered as alternatives to net income as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. These non-GAAP measures are key metrics used by management, our board of directors, and LGP to assess our financial performance. We present these non-GAAP measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance and because we believe it is useful for investors to see the measures that management uses to evaluate the Company. These non-GAAP measures are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. In evaluating these non-GAAP measures, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of these non-GAAP measures should not be construed to imply that our future results will be unaffected by any such
(2) | We have presented EBITDA, Adjusted EBITDA, adjusted net loss, and adjusted net loss per common share – diluted as supplemental measures of financial performance that are not required by, or presented in accordance with, accounting principles generally accepted in the United States of America (“GAAP”). These non-GAAP measures should not be considered as alternatives to net loss as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. These non-GAAP measures are key metrics used by management, our board of directors, and Leonard Green and Partners, L.P. (“LGP”) to assess our financial performance. We present these non-GAAP measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance and because we believe it is useful for investors to see the measures that management uses to evaluate the Company. These non-GAAP measures are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. In evaluating these non-GAAP measures, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of these non-GAAP measures should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by relying on our GAAP results in addition to using non-GAAP measures supplementally. Our non-GAAP measures are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation. Please refer to footnotes (3) and (4) of this table for further information regarding why we believe each non-GAAP measure provides useful information to investors regarding our financial condition and results of operations, as well as the additional purposes for which management uses each non-GAAP financial measure. |
Additionally, this Management’s Discussion and Analysis also refers to Elfa third-party net sales after the conversion of Elfa’s net sales from Swedish krona to U.S. dollars using the prior year’s conversion rate. The Company believes the disclosure of Elfa third-party net sales without the effects of currency exchange rate fluctuations helps investors understand the Company’s underlying performance.
(3) |
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EBITDA and Adjusted EBITDA, are included in this Quarterly Report on Form 10-Q because they are key metrics used by management, our board of directors and LGP to assess our financial performance. In addition, we use Adjusted EBITDA in connection with covenant compliance and executive performance evaluations, and we use Adjusted EBITDA to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. We believe it is useful for investors to see the measures that management uses to evaluate the Company, its executives and our covenant compliance, as applicable. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry.
EBITDA and Adjusted EBITDA are not GAAP measures of our financial performance or liquidity and should not be considered as alternatives to net income (loss) as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Additionally, EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for management’s discretionary use, as they do not reflect certain cash requirements such as tax payments, debt service requirements, capital expenditures, store openings and certain other cash costs that may recur in the future. EBITDA and Adjusted EBITDA contain certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized. In evaluating Adjusted
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EBITDA, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation, such as pre-opening costs and stock compensation expense. Our presentation of Adjusted EBITDA should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by relying on our GAAP results in addition to using EBITDA and Adjusted EBITDA supplementally. Our measures of EBITDA and Adjusted EBITDA margin are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.
A reconciliation of net incomeloss to EBITDA and Adjusted EBITDA is set forth below:
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| Thirteen Weeks Ended |
| Thirty-Nine Weeks Ended |
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|
| December 30, |
| December 31, |
| December 30, |
| December 31, |
|
| Thirteen Weeks Ended | ||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| June 29, |
| June 30, | ||
Net income |
| $28,379 |
| $5,092 |
| $19,827 |
| $6,576 |
| ||||||
|
| 2019 |
| 2018 | |||||||||||
|
|
|
|
|
| ||||||||||
Net loss |
| $ | (4,099) |
| $ | (6,764) | |||||||||
Depreciation and amortization |
| 9,477 |
| 9,236 |
| 28,524 |
| 28,061 |
|
|
| 9,706 |
|
| 9,337 |
Interest expense, net |
| 7,300 |
| 4,119 |
| 17,398 |
| 12,434 |
|
|
| 5,709 |
|
| 7,908 |
(Benefit) provision for income taxes |
| (21,780 | ) | 3,350 |
| (25,848 | ) | 4,851 |
| ||||||
Income tax benefit |
|
| (1,795) |
|
| (3,480) | |||||||||
EBITDA |
| 23,376 |
| 21,797 |
| 39,901 |
| 51,922 |
|
|
| 9,521 |
|
| 7,001 |
Pre-opening costs (a) |
| 1,872 |
| 2,918 |
| 4,676 |
| 6,558 |
|
|
| 477 |
|
| 346 |
Non-cash rent (b) |
| (714 | ) | (298 | ) | (1,451 | ) | (970 | ) | ||||||
Non-cash lease expense (b) |
|
| (64) |
|
| (637) | |||||||||
Stock-based compensation (c) |
| 585 |
| 599 |
| 1,589 |
| 1,355 |
|
|
| 811 |
|
| 586 |
Loss on extinguishment of debt (d) |
| - |
| - |
| 2,369 |
| - |
| ||||||
Foreign exchange (gains) losses (e) |
| (360 | ) | 53 |
| (306 | ) | (211 | ) | ||||||
Optimization Plan implementation charges (f) |
| 422 |
| - |
| 10,742 |
| - |
| ||||||
Elfa manufacturing facility closure (g) |
| 335 |
| - |
| 852 |
| - |
| ||||||
Foreign exchange (gains) losses (d) |
|
| (75) |
|
| 38 | |||||||||
Optimization Plan implementation charges (e) |
|
| — |
|
| 4,864 | |||||||||
Other adjustments |
| 45 |
| 249 |
| 135 |
| 996 |
|
|
| (27) |
|
| 193 |
Adjusted EBITDA |
| $25,561 |
| $25,318 |
| $58,507 |
| $59,650 |
|
| $ | 10,643 |
| $ | 12,391 |
(a) | Non-capital expenditures associated with opening new stores and relocating stores, including marketing expenses, travel and relocation costs, and training costs. We adjust for these costs to facilitate comparisons of our performance from period to period. |
(b) | Reflects the extent to which our annual GAAP operating lease expense has been above or below our cash operating lease payments. The amount varies depending on the average age of our lease portfolio (weighted for size), as our GAAP operating lease expense on younger leases typically exceeds our cash operating lease payments, while our GAAP operating lease expense on older leases is typically less than our cash operating lease payments. |
(a)Non-capital expenditures associated with opening new stores and relocating stores, including rent, marketing expenses, travel and relocation costs, and training costs. We adjust for these costs
(c) | Non-cash charges related to stock-based compensation programs, which vary from period to period depending on volume and vesting timing of awards. We adjust for these charges to facilitate comparisons from period to period. |
(d) | Realized foreign exchange transactional gains/losses our management does not consider in our evaluation of our ongoing operations. |
(e) | Charges incurred to implement our four-part optimization plan to drive improved sales and profitability, launched during fiscal 2017 (the “Optimization Plan”), which include certain consulting costs recorded in selling, general and administrative expenses (“SG&A”) in the first quarter of fiscal 2018, which we do not consider in our evaluation of ongoing performance. |
(f) | Other adjustments include amounts our management does not consider in our evaluation of our ongoing operations, including certain severance and other charges. |
(4) | Adjusted net loss and adjusted net loss per common share – diluted have been presented in this Quarterly Report on Form 10-Q as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define adjusted net loss as net loss before restructuring charges, losses on extinguishment of debt, certain gains on disposal of assets, certain management transition costs incurred and benefits realized, charges incurred as part of the implementation of our Optimization Plan, charges associated with an Elfa manufacturing facility closure, and the tax impact of these adjustments and other unusual or infrequent tax items. We define |
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adjusted net loss per common share – diluted as adjusted net loss divided by the diluted weighted average common shares outstanding. We use adjusted net loss and adjusted net loss per common share – diluted to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. We present adjusted net loss and adjusted net loss per common share – diluted because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance and because we believe it is useful for investors to see the measures that management uses to evaluate the Company. |
(b)Reflects the extent to which our annual GAAP rent expense has been above or below our cash rent payment due to lease accounting adjustments. The adjustment varies depending on the average age of our lease portfolio (weighted for size), as our GAAP rent expense on younger leases typically exceeds our cash cost, while our GAAP rent expense on older leases is typically less than our cash cost.
(c)Non-cash charges related to stock-based compensation programs, which vary from period to period depending on volume and vesting timing of awards. We adjust for these charges to facilitate comparisons from period to period.
(d)Loss recorded as a result of the amendments made to the Senior Secured Term Loan Facility and the Revolving Credit Facility in August 2017, which we do not consider in our evaluation of our ongoing operations.
(e)Realized foreign exchange transactional gains/losses our management does not consider in our evaluation of our ongoing operations.
(f)Charges incurred to implement our Optimization Plan, which include certain consulting costs recorded in selling, general and administrative expenses, cash severance payments associated with the elimination of certain full-time positions at the TCS segment recorded in other expenses, and cash severance payments associated with organizational realignment at the Elfa segment recorded in other expenses, which we do not consider in our evaluation of ongoing performance.
(g)Charges related to the closure of an Elfa manufacturing facility in Lahti, Finland in December 2017, recorded in other expenses, which we do not consider in our evaluation of our ongoing performance.
(h)Other adjustments include amounts our management does not consider in our evaluation of our ongoing operations, including certain severance and other charges.
(4) Adjusted net income and adjusted net income per diluted share have been presented in this Quarterly Report on Form 10-Q as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define adjusted net income as net income available to common shareholders before distributions accumulated to preferred shareholders, stock-based compensation and other costs in connection with our IPO, restructuring charges, impairment charges related to intangible assets, losses on extinguishment of debt, certain gains on disposal of assets, certain management transition costs incurred and benefits realized, charges incurred as part of the implementation of our Optimization Plan, and the tax impact of these adjustments and other unusual or infrequent tax items. We define adjusted net income per diluted share as adjusted net income divided by the diluted weighted average common shares outstanding. We use adjusted net income and adjusted net income per diluted share to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. We present adjusted net income and adjusted net income per diluted share because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance and because we believe it is useful for investors to see the measures that management uses to evaluate the Company.
We have included a presentation of adjusted net income and adjusted net income per diluted share for the thirteen and thirty-nine weeks ended December 31, 2016 to show the net impact of the amended and restated employment agreements entered into with key executives during the thirteen and thirty-nine weeks ended December 31, 2016 (“management transition costs (benefits)”). Although we disclosed the net positive impact of the amended and restated employment agreements in our discussions of earnings per share and SG&A in our fiscal 2016 filings with the SEC, we did not adjust for the net impact of these agreements in our fiscal 2016 presentation of adjusted net income and adjusted net income per diluted share. However, in the thirteen and thirty-nine weeks ended December 30, 2017, our Optimization Plan has caused us to incur similar charges that we believe are not indicative of our core operating performance, and we expect to continue to incur such charges in the remainder of fiscal 2017. As a result, we believe that adjusting net income and net income per diluted share in the thirteen and thirty-nine weeks ended December 31, 2016 for management transition costs (benefits), in addition to adjusting net income and net income per diluted share for the thirteen and thirty-nine weeks ended December 30, 2017 for charges incurred as part of the implementation of our Optimization Plan will assist investors in comparing our core operating performance across reporting periods on a consistent basis.
A reconciliation of the GAAP financial measures of net incomeloss and net incomeloss per common share – diluted share to the non-GAAP financial measures of adjusted net incomeloss and adjusted net incomeloss per common share – diluted share is set forth below:
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| Thirteen Weeks Ended |
| Thirty-Nine Weeks Ended |
| ||||
|
| December 30, |
| December 31, |
| December 30, |
| December 31, |
|
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
Numerator: |
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|
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|
|
Net income |
| $28,379 |
| $5,092 |
| $19,827 |
| $6,576 |
|
Management transition costs (benefits) (a) |
| - |
| 182 |
| - |
| (3,071 | ) |
Elfa manufacturing facility closure (b) |
| 335 |
| - |
| 852 |
| - |
|
Loss on extinguishment of debt (c) |
| - |
| - |
| 2,369 |
| - |
|
Optimization Plan implementation charges (d) |
| 422 |
| - |
| 10,742 |
| - |
|
Taxes (e) |
| (24,053 | ) | (46) |
| (28,637 | ) | 1,147 |
|
Adjusted net income |
| $5,083 |
| $5,228 |
| $5,153 |
| $4,652 |
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Denominator: |
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Weighted average common shares outstanding - diluted |
| 48,167,882 |
| 48,022,499 |
| 48,128,682 |
| 48,002,495 |
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|
|
|
|
|
|
|
|
|
Adjusted net income per common share - diluted |
| $0.11 |
| $0.11 |
| $0.11 |
| $0.10 |
|
|
|
|
|
|
|
|
|
| Thirteen Weeks Ended | ||||
|
| June 29, |
| June 30, | ||
|
| 2019 |
| 2018 | ||
|
|
|
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| |
Numerator: |
|
|
|
|
|
|
Net loss |
| $ | (4,099) |
| $ | (6,764) |
Optimization Plan implementation charges (a) |
|
| — |
|
| 4,864 |
Taxes (b) |
|
| — |
|
| (2,112) |
Adjusted net loss |
| $ | (4,099) |
| $ | (4,012) |
Denominator: |
|
|
|
|
|
|
Weighted-average common shares outstanding — diluted |
|
| 48,231,148 |
|
| 48,138,907 |
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|
|
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|
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Net loss per common share — diluted |
| $ | (0.08) |
| $ | (0.14) |
Adjusted net loss per common share — diluted |
| $ | (0.08) |
| $ | (0.08) |
(a) | Charges incurred to implement our Optimization Plan, which include certain consulting costs recorded in SG&A in the first quarter of fiscal 2018, which we do not consider in our evaluation of ongoing performance. |
(a)Certain management transition costs incurred and benefits realized, including the
(b) | Tax impact of adjustments to net loss and the tax benefit recorded in the first quarter of fiscal 2018 as a result of a reduction in the Swedish tax rate, which are considered to be unusual or infrequent tax items, all of which we do not consider in our evaluation of ongoing performance. |
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(b)Charges related to the closure of an Elfa manufacturing facility in Lahti, Finland in December 2017, recorded in other expenses, which we do not consider in our evaluation of our ongoing performance.
(c)Loss recorded as a result of the amendments made to the Senior Secured Term Loan Facility and the Revolving Credit Facility in August 2017, which we do not consider in our evaluation of our ongoing operations.
(d)Charges incurred to implement our Optimization Plan, which includes certain consulting costs recorded in selling, general and administrative expenses, cash severance payments associated with the elimination of certain full-time positions at the TCS segment recorded in other expenses, and cash severance payments associated with organizational realignment at the Elfa segment recorded in other expenses, which we do not consider in our evaluation of ongoing performance.
(e)Tax impact of adjustments to net income, as well as the estimated impact of the Tax Cuts and Jobs Act enacted in the third quarter of fiscal 2017, which is considered to be an unusual or infrequent tax item, all of which we do not consider in our evaluation of ongoing performance.
Thirteen Weeks Ended December 30, 2017June 29, 2019 Compared to Thirteen Weeks Ended December 31, 2016June 30, 2018
Net sales
The following table summarizes our net sales for each of the thirteen weeks ended DecemberJune 29, 2019 and June 30, 2017 and December 31, 2016:2018:
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| December 30, |
| % total |
| December 31, |
| % total |
| June 29, 2019 |
| % total |
| June 30, 2018 |
| % total |
| ||
TCS net sales |
| $203,881 |
| 91.4 | % | $199,087 |
| 92.0% |
| $ | 195,076 |
| 93.1 | % | $ | 180,082 |
| 92.0 | % |
Elfa third party net sales |
| 19,105 |
| 8.6 | % | 17,293 |
| 8.0% |
|
| 14,444 |
| 6.9 | % |
| 15,741 |
| 8.0 | % |
Net sales |
| $222,986 |
| 100.0 | % | $216,380 |
| 100.0% |
| $ | 209,520 |
| 100.0 | % | $ | 195,823 |
| 100.0 | % |
Net sales in the thirteen weeks ended December 30, 2017June 29, 2019 increased by $6,606, $13,697, or 3.1%7.0%, compared to the thirteen weeks ended December 31, 2016.June 30, 2018. This increase iswas comprised of the following components:
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| Net sales | |
Net sales for the thirteen weeks ended June 30, 2018 |
| $ | 195,823 |
Incremental net sales increase (decrease) due to: |
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|
|
Comparable stores (including a $5,108, or 29.2%, increase in online sales) |
|
| 13,826 |
New stores |
|
| 754 |
Elfa third party net sales (excluding impact of foreign currency translation) |
|
| (14) |
Impact of foreign currency translation on Elfa third party net sales |
|
| (1,283) |
Shipping and delivery |
|
| 414 |
Net sales for the thirteen weeks ended June 29, 2019 |
| $ | 209,520 |
In the thirteen weeks ended December 30, 2017, tenJune 29, 2019, comparable stores generated a $13,826, or 7.8% increase in net sales. Additionally, two new stores generated $4,999$754 of incremental net sales, sixboth of which were opened during fiscal 2016 and four of which were opened in the first thirty-nine weeks of fiscal 2017. New store sales were partially offset by a $316, or a 0.2%, decrease in net sales from comparable stores.2018. Elfa third party net sales increased $1,812decreased $1,297 in the thirteen weeks ended December 30, 2017, primarily due to the positive impact of foreign currency translation, which increased third party net sales by $1,439.June 29, 2019. After converting Elfa’s third party net sales from Swedish krona to U.S. dollars using the prior year’s conversion rate for both the thirteen weeks ended December 30, 2017June 29, 2019 and thirteen weeks ended December 31, 2016,June 30, 2018, Elfa third party net sales increased $373 primarily due to higher net sales in Russia.decreased $14.
Gross profit and gross margin
Gross profit in the thirteen weeks ended December 30, 2017June 29, 2019 increased by $4,859,$5,036, or 3.9%4.4%, compared to the thirteen weeks ended December 31, 2016. The increase in gross profit was primarily the result of increased consolidated net sales, combined with an increase in consolidated gross margin. The following table summarizes the gross margin for the thirteen weeks ended DecemberJune 30, 2017 and December 31, 2016 by segment and total. The segment gross margins include the impact of inter-segment net sales from the Elfa segment to the TCS segment:
|
| December 30, 2017 |
| December 31, 2016 |
TCS gross margin |
| 58.1% |
| 57.0% |
Elfa gross margin |
| 36.3% |
| 37.8% |
Total gross margin |
| 58.6% |
| 58.1% |
TCS gross margin increased 110 basis points, as lower cost of goods associated with the Optimization Plan and the benefit of favorable foreign currency contracts were partially offset by higher costs associated with our installation services business during the quarter. Elfa gross margin decreased 150 basis points primarily due to higher direct materials costs during the quarter. In total, gross margin increased 50 basis points as the increase in TCS gross margin was partially offset by the decrease in Elfa gross margin.
Selling, general and administrative expenses
Selling, general and administrative expenses in the thirteen weeks ended December 30, 2017 increased by $3,688, or 3.7%, compared to the thirteen weeks ended December 31, 2016. As a percentage of consolidated net sales, selling, general and administrative expenses increased by 30 basis points. The following table summarizes selling, general and administrative expenses as a percentage of total net sales for the thirteen weeks ended December 30, 2017 and December 31, 2016:
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| December 30, 2017 |
| December 31, 2016 |
|
| % of Net sales |
| % of Net sales |
TCS selling, general and administrative |
| 42.7% |
| 42.0% |
Elfa selling, general and administrative |
| 3.9% |
| 4.3% |
Total selling, general and administrative |
| 46.6% |
| 46.3% |
TCS selling, general and administrative expenses increased by 70 basis points as a percentage of consolidated net sales. This was primarily due to an increase in marketing and technology-related expenses, as well as deleverage of occupancy costs associated with negative comparable store net sales during the quarter. Elfa selling, general and administrative expenses decreased by 40 basis points as a percentage of consolidated net sales, primarily due to ongoing savings and efficiency efforts.
Pre-opening costs
Pre-opening costs decreased by $1,046, or 35.8%, in the thirteen weeks ended December 30, 2017 to $1,872, as compared to $2,918 in the thirteen weeks ended December 31, 2016. We opened three stores, inclusive of one relocation, in the thirteen weeks ended December 30, 2017, and we opened four stores in the thirteen weeks ended December 31, 2016.
Other expenses
Other expenses of $751 were recorded in the thirteen weeks ended December 30, 2017. The Company incurred $416 of charges related to the implementation of the Optimization Plan. Additionally, the Company recorded $335 of expenses in connection with the closure of an Elfa manufacturing facility in Lahti, Finland in December 2017, which are primarily related to severance. The Company expects to incur approximately $1,000 of total expenses related to the closure of the manufacturing facility in fiscal 2017.
Interest expense
Interest expense increased by $3,181, or 77.2%, in the thirteen weeks ended December 30, 2017 to $7,300, as compared to $4,119 in the thirteen weeks ended December 31, 2016. On August 18, 2017, the Company entered into a fourth amendment (the “Term Loan Amendment”) to the Senior Secured Term Loan Facility dated as of April 6, 2012. The fourth amendment amends the Senior Secured Term Loan Facility to, among other things, increase the applicable interest rate margin to 7.00% for LIBOR loans and 6.00% for base rate loans, which resulted in increased interest expense during the thirteen weeks ended December 30, 2017. The Company expects to incur approximately $25,000 of total interest expense in fiscal 2017.
Taxes
The benefit for income taxes in the thirteen weeks ended December 30, 2017 was $21,780 as compared to a provision of $3,350 in the thirteen weeks ended December 31, 2016. The effective tax rate for the thirteen weeks ended December 30, 2017 was -330.1%, as compared to 39.7% in the thirteen weeks ended December 31, 2016. The decrease in the effective tax rate is primarily due to the initial estimated impact of the Tax Cuts and Jobs Act (the “Tax Act”) enacted during the thirteen weeks ended December 30, 2017, which was primarily driven by the remeasurement of deferred tax balances resulting in the recognition of a provisional benefit of $24,253 in the thirteen weeks ended December 30, 2017.
The Company has made a provisional estimate of the impact of remeasuring its deferred tax balances during the third fiscal quarter of 2017 and has not been able to reasonably estimate the one-time transition tax on the earnings of foreign subsidiaries and continues to account for foreign earnings based on the provisions of the tax laws that were in effect immediately prior to the enactment of the Tax Act. Pursuant to Staff Accounting Bulletin No. 118, the Company’s measurement period for implementing the accounting changes required by the Tax Act will close before December 22, 2018 and the Company anticipates completing the accounting under ASC Topic 740 in a subsequent reporting period within the measurement period.
Due to the Tax Act, the effective tax rate for fiscal 2017 is now estimated to be approximately -170%. However, excluding the impact of the provisional benefit of $24,253 related to the remeasurement of deferred tax balances recorded in the thirteen weeks ended December 30, 2017, the effective tax rate for fiscal 2017 is estimated to be in the mid-30% range. We believe that presenting the anticipated effective tax rate excluding the impact of the provisional benefit for the measurement of deferred tax assets assists provides investors with better insight into our anticipated fiscal 2017 performance. The Company is not able to estimate any future adjustments to the provisional amount recognized for the remeasurement of deferred tax balances. The effective tax rate for fiscal 2018 and beyond is estimated to be in the high-20% range. The foregoing estimated effective tax rate ranges exclude the impact of the one-time transition tax on foreign earnings, as the timing and amount of this tax cannot be reasonably estimated.
Thirty-Nine Weeks Ended December 30, 2017 Compared to Thirty-Nine Weeks Ended December 31, 2016
Net sales
The following table summarizes our net sales for the thirty-nine weeks ended December 30, 2017 and December 31, 2016:
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| December 30, |
| % total |
| December 31, |
| % total |
TCS net sales |
| $573,261 |
| 91.8 | % | $549,423 |
| 91.7% |
Elfa third party net sales |
| 51,203 |
| 8.2 | % | 49,465 |
| 8.3% |
Net sales |
| $624,464 |
| 100.0 | % | $598,888 |
| 100.0% |
Net sales in the thirty-nine weeks ended December 30, 2017 increased by $25,576, or 4.3%, compared to the thirty-nine weeks ended December 31, 2016. This increase is comprised of the following components:
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In the thirty-nine weeks ended December 30, 2017, thirteen new stores generated $22,301 of incremental net sales, nine of which were opened prior to or during fiscal 2016 and four of which were opened in the first thirty-nine weeks of fiscal 2017. Additionally, comparable stores generated $1,196, or 0.2%, of incremental net sales. Elfa third party net sales increased $1,738 during the thirty-nine weeks ended December 30, 2017, primarily due to the positive impact of foreign currency translation, which increased third party net sales by $1,040. After converting Elfa’s third party net sales from Swedish krona to U.S. dollars using the prior year’s conversion rate for both the thirty-nine weeks ended December 30, 2017 and the thirty-nine weeks ended December 31, 2016, Elfa third party net sales increased $698 primarily due to higher net sales in Russia.
Gross profit and gross margin
Gross profit in the thirty-nine weeks ended December 30, 2017 increased by $11,793, or 3.4%, compared to the thirty-nine weeks ended December 31, 2016.2018. The increase in gross profit was primarily the result of increased consolidated net sales, partially offset by a decrease in consolidated gross margin. The following table summarizes the gross margin for the thirty-ninethirteen weeks ended DecemberJune 29, 2019 and June 30, 2017 and December 31, 20162018 by segment and total. The segment gross margins include the impact of inter-segment net sales from the Elfa segment to the TCS segment:
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| December 30, 2017 |
| December 31, 2016 |
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| June 29, 2019 |
| June 30, 2018 |
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TCS gross margin |
| 57.3% |
| 57.6% |
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| 57.4 | % | 57.9 | % |
Elfa gross margin |
| 37.6% |
| 39.1% |
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| 36.3 | % | 37.3 | % |
Total gross margin |
| 57.7% |
| 58.2% |
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| 57.2 | % | 58.6 | % |
On a consolidated basis,TCS gross margin decreased 50 basis points as a result of decreased gross margin at TCS and Elfa during the first thirty-nine weeks of fiscal 2017. TCS gross margin declined 30 basis points, primarily due to marketing and merchandising campaigns that drove a higher costs associated with our installation services business, combined with a greater portionmix of campaign driven sales, generated by
merchandise campaigns, partially offset by lower cost of goods associated with the Optimization Plan.an improvement in foreign currency translation. Elfa segment gross margin declined 150decreased 100 basis points primarily due to higher direct materials costs.costs attributable to higher raw materials prices and a weaker Swedish krona. In total, gross margin decreased 140 basis points primarily due to a higher mix of lower margin products and services sold in the first quarter of fiscal 2019.
Selling, general and administrative expenses
Selling, general and administrative expenses in the thirty-ninethirteen weeks ended December 30, 2017June 29, 2019 increased by $18,829,$2,424, or 6.5%2.3%, compared to the thirty-ninethirteen weeks ended December 31, 2016.June 30, 2018. As a percentage of consolidated net sales, selling, general and administrative expenses increasedSG&A decreased by 100 240
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basis points. The following table summarizes selling, general and administrative expensesSG&A as a percentage of consolidated net sales for the thirty-ninethirteen weeks ended DecemberJune 29, 2019 and June 30, 2017 and December 31, 2016:2018:
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| December 30, 2017 |
| December 31, 2016 |
| June 29, 2019 |
| June 30, 2018 |
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| % of Net sales |
| % of Net sales |
| % of Net sales |
| % of Net sales |
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TCS selling, general and administrative |
| 45.1% |
| 43.7% |
| 48.5 | % | 50.2 | % |
Elfa selling, general and administrative |
| 4.0% |
| 4.4% |
| 3.5 | % | 4.2 | % |
Total selling, general and administrative |
| 49.1% |
| 48.1% |
| 52.0 | % | 54.4 | % |
TCS selling, general and administrative expenses increaseddecreased by 140170 basis points as a percentage of consolidated net sales. The increaseThis was primarily due to consulting costs incurred as part of the Optimization Plan which contributed 105 basis points to the increaseexpenses incurred in the first thirty-nine weeksquarter of fiscal 2017. Additionally, the impact of amended and restated employment agreements entered into with key executives during fiscal 2016, which led to the reversal of accrued deferred compensation associated with the original employment agreements, net of costs2018 that were not incurred to execute the agreements, contributed a 65 basis points benefit in the thirty-nine weeks ended December 31, 2016. This combined 170 basis points year-over-year increase was partially offset by a 30 basis point improvement in TCS selling, general and administrative expenses as a percentagefirst quarter of net sales, primarily due to ongoing savings and efficiency efforts, inclusive of savings from the Optimization Plan, as well as lower self-insurance costs,fiscal 2019, partially offset by increased occupancyCustom Closets marketing expenses and costs and an increase in marketing and technology-related expenses. associated with the second distribution center.Elfa selling, general and administrative expenses decreased by 4070 basis points as a percentage of consolidated net sales, primarily due to ongoing savings and efficiency efforts.
Pre-opening costs
Pre-opening costs decreased by $1,882, or 28.7% in the thirty-nine weeks ended December 30, 2017 to $4,676, as compared to $6,558 in the thirty-nine weeks ended December 31, 2016. We opened five stores, inclusive of one relocation, in the thirty-nine weeks ended December 30, 2017, and we opened seven stores in the thirty-nine weeks ended December 31, 2016.
Other expenses
Other expenses of $4,908 were recorded in the thirty-nine weeks ended December 30, 2017, which were primarily related to severance costs associated with the Optimization Plan. The Company incurred $1,836 of severance charges associated with the elimination of certain full-time positions at TCS, as well as $2,220 of severance charges associated with organizational realignment at Elfa. Additionally, other expenses of $852 were recorded in connection with the closure of an Elfa manufacturing facility in Lahti, Finland in December 2017, which are primarily related to severance, an increase in the reserve for inventory obsolescence related to raw materials that were disposed of upon closure of the facility, and accelerated depreciation on machinery and equipment that was disposed of upon closure of the facility. The Company expects to incur approximately $1,000 of total expenses related to the closure of the manufacturing facility in fiscal 2017.
Interest expense and loss on extinguishment of debt
Interest expense increaseddecreased by $4,964,$2,199, or 39.9%27.8%, in the thirty-ninethirteen weeks ended December 30, 2017June 29, 2019 to $17,398,$5,709, as compared to $12,434$7,908 in the thirty-ninethirteen weeks ended December 31, 2016. June 30, 2018. This decrease is primarily due to an amendmentOn August 18, 2017, the Company entered into a fourth amendment (the “Term Loan“Fifth Amendment”) to the Senior Secured Term Loan Facility dated as(as defined below) that was entered into during the second quarter of April 6, 2012. The fourth amendment amends the Senior Secured Term Loan Facilityfiscal 2018, pursuant to which, among other things, increase the applicable interest rate margin was decreased to 7.00%5.00% for LIBOR loans and 6.00%4.00% for base rate loans, which resulted in increased interest expense during the thirty-nine weeks ended December 30, 2017. The Company expects to incur approximately $25,000 of total interest expense in fiscal 2017.loans.
Additionally, as a result of the Term Loan Amendment, the Company recorded $2,369 of loss on extinguishment of debt in the thirty-nine weeks ended December 30, 2017.
Taxes
The benefit for income taxes in the thirty-ninethirteen weeks ended December 30, 2017June 29, 2019 was $25,848,$1,795 as compared to a provision for income taxes of $4,851$3,480 in the thirty-ninethirteen weeks ended December 31, 2016.June 30, 2018. The effective tax rate for the thirty-ninethirteen weeks ended December 30, 2017June 29, 2019 was 429.3%30.5%, as compared to 42.5%34.0% in the thirty-ninethirteen weeks ended December 31, 2016.June 30, 2018. The increasedecrease in the effective tax rate is primarily due to the initial estimated impact of the Tax Act enacted during the thirteen weeks ended December 30, 2017, which was primarily driven by the remeasurement of deferred tax balances resulting in the recognitionfirst quarter of fiscal 2018 as a result of a provisional benefit of $24,253change in the third fiscal quarter, combined with the impact of a pre-tax loss position in the thirty-nine weeks ended December 30, 2017, as compared to a pre-tax income position in the thirty-nine weeks ended December 31, 2016.Swedish tax rate.
The Company has made a provisional estimate of the impact of remeasuring its deferred tax balances during the third fiscal quarter of 2017 and has not been able to reasonably estimate the one-time transition tax on the earnings of foreign subsidiaries and continues to account for foreign earnings based on the provisions of the tax laws that were in effect immediately prior to the enactment of the Tax Act. Pursuant to Staff Accounting Bulletin No. 118, the Company’s measurement period for implementing the accounting changes required by the Tax Act will close before December 22, 2018 and the Company anticipates completing the accounting under ASC Topic 740 in a subsequent reporting period within the measurement period.
Due to the Tax Act, the effective tax rate for fiscal 2017 is now estimated to be approximately -170%. However, excluding the impact of the provisional benefit of $24,253 related to the remeasurement of deferred tax balances recorded in the thirteen weeks ended December 30, 2017, the effective tax rate for fiscal 2017 is estimated to be in the mid-30% range. We believe that presenting the anticipated effective tax rate excluding the impact of the provisional benefit for the measurement of deferred tax assets assists provides investors with better insight into our anticipated fiscal 2017 performance. The Company is not able to estimate any future adjustments to the provisional amount recognized for the remeasurement of deferred tax balances. The effective tax rate for fiscal 2018 and beyond is estimated to be in the high-20% range. The foregoing estimated effective tax rate ranges exclude the impact of the one-time transition tax on foreign earnings, as the timing and amount of this tax cannot be reasonably estimated.
Liquidity and Capital Resources
We relyhave relied on cash flows from operations, a $100,000 asset-based revolving credit agreement (the “Revolving Credit Facility” as further discussed under “Revolving Credit Facility” below), and the SEK 140.0 million (approximately $17,129 as of December 30, 2017) 2014 Elfa revolving credit facility (the “2014 Elfa Revolving Credit Facility” as further discussed under “20142019 Elfa Senior Secured Credit Facilities”Facilities (as defined below) as our primary sources of liquidity. Our primary cash needs are for merchandise inventories, direct materials, payroll, store rent,leases, capital expenditures associated with opening new stores and updating existing stores, as well as information technology and infrastructure, including thebuilding our second distribution center, and Elfa manufacturing facility enhancements. The most significant components of our operating assets and liabilities are merchandise inventories, accounts receivable, prepaid expenses and other
assets, accounts payable, operating lease assets and liabilities, other current and non-current liabilities, taxes receivable and taxes payable. Our liquidity fluctuates as a result of our building inventory for key selling periods, and as a result, our borrowings are generally higher during these periods when compared to the rest of our fiscal year. Our borrowings generally increase in our second and third fiscal quarters as we prepare for Our Annual Shelving Sale, the holiday season, and Our Annual elfa® Sale. We believe that cash expected to be generated from operations and the availability of borrowings under the Revolving Credit Facility and the 20142019 Elfa RevolvingSenior Secured Credit FacilityFacilities will be sufficient to meet liquidity requirements, anticipated capital expenditures, and payments due under our existing credit facilities for at least the next 2412 months. In the future, we may seek to raise additional capital, which could be in the form of loans, bonds, convertible debt or equity, to fund our operations and capital expenditures. There can be no assurance that we will be able to raise additional capital on favorable terms or at all.
At December 30, 2017,June 29, 2019, we had $22,653$11,404 of cash, of which $12,913$3,852 was held by our foreign subsidiaries. Pursuant to the Tax Act, we will be required to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. The Company has not been able to determine a reasonable estimate of this one-time transition tax and will recognize this in a subsequent reporting period when a reasonable estimate can be determined. Future amounts earned in our foreign subsidiaries are not expected to be subject to federal income taxes upon transfer to the U.S. If these funds were transferred to the U.S., we may; however, be required to pay taxes in certain international jurisdictions as well as certain states. However, it is our intent to indefinitely reinvest these funds outside the U.S. In addition, we had $62,854$57,029 of additional availability under the Revolving Credit Facility and approximately $17,129$14,276 of additional
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availability under the 20142019 Elfa Revolving Credit Facility (as defined below) as of December 30, 2017.June 29, 2019. There were $4,023$4,450 in letters of credit outstanding under the Revolving Credit Facility and other contracts at that date.
Cash flow analysis
A summary of our operating, investingkey components and financing activitiesmeasures of liquidity are shown in the following table:
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| December 31, |
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| 2016 |
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Net cash provided by operating activities |
| $39,392 |
| $23,875 |
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| June 30, | |||||||
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| 2019 |
| 2018 | |||||||
Net cash used in operating activities |
| $ | (8,321) |
| $ | (3,320) | |||||
Net cash used in investing activities |
| (20,082 | ) | (21,003 | ) |
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| (8,699) |
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| (4,455) |
Net cash (used in) provided by financing activities |
| (8,170 | ) | 7,361 |
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Net cash provided by financing activities |
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| 21,274 |
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| 13,842 | |||||
Effect of exchange rate changes on cash |
| 777 |
| (551 | ) |
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| (214) |
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Net increase in cash |
| $11,917 |
| $9,682 |
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| $ | 4,040 |
| $ | 5,703 |
Free cash flow (Non-GAAP) (1) |
| $ | (17,024) |
| $ | (7,776) |
(1) | See below for a discussion of this non-GAAP financial measure and reconciliation to its most directly comparable GAAP financial measure. |
Net cash provided byused in operating activities
Cash from operating activities consists primarily of net incomeloss adjusted for non-cash items, including depreciation and amortization, deferred taxes and the effect of changes in operating assets and liabilities.
Net cash provided byused in operating activities was $39,392$8,321 for the thirty-ninethirteen weeks ended December 30, 2017. NetJune 29, 2019. Non-cash items of $9,087 and net income of $19,827 and non-cash items of $7,694$4,099 were partially offset by a net change in operating assets and liabilities of $11,871.$13,309. The net change in operating assets and liabilities is primarily due to an increase in accounts payablemerchandise inventory due to new product introductions and accrued liabilities,inventory build-up related to the new distribution center as well as timing of credit card receivables, partially offset by an increase in merchandise inventory and decreases in income taxesaccounts payable and other noncurrentaccrued liabilities primarily driven by timing of inventory receipts during the thirty-ninethirteen weeks ended December 30, 2017.June 29, 2019.
Net cash provided byused in operating activities was $23,875$3,320 for the thirty-ninethirteen weeks ended December 31, 2016. Non-cash itemsJune 30, 2018. Net loss of $29,719$6,764 and net income of $6,576 were partially offset by a net change in operating assets and liabilities of $12,420,$3,404 were partially offset by non-cash items of $6,848. The net change in operating assets and liabilities is primarily due to increasesan increase in accounts receivablemerchandise inventory and merchandise inventory,a decrease in income taxes payable, partially offset by increasesa decrease in accounts payable and accrued liabilities during the thirty-ninethirteen weeks ended December 31, 2016.June 30, 2018.
Net cash used in investing activities
Investing activities consist primarily of capital expenditures for new store openings, existing store remodels, infrastructure, information systems, and our distribution center.centers.
Our total capital expenditures for the thirty-ninethirteen weeks ended DecemberJune 29, 2019 were $8,703 with new store openings, relocations and existing store remodels accounting for less than half of spending at $2,303. We did not open any stores during the thirteen weeks ended June 29, 2019. We incurred $4,416 of capital expenditures for distribution centers, the majority of which is related to the new distribution center in Aberdeen, Maryland, which is expected to be operational in late fiscal 2019. The remaining capital expenditures of $1,984 were primarily for investments in information technology and new product rollouts.
Our total capital expenditures for the thirteen weeks ended June 30, 20172018 were $20,101$4,456 with new store openings, relocations and existing store remodels accounting for more than half of spending at $11,466.$2,388. We opened five stores, including one relocation,store during the thirty-ninethirteen weeks ended DecemberJune 30, 2017.2018. The remaining capital expenditures of $8,635$2,068 were primarily for investments in information technology, our corporate offices and distribution center enhancements.
Our total capital expenditures for the thirty-nine weeks ended December 31, 2016 were $21,010 with new store openings, relocations and existing store remodels accounting for the majority of spending at $12,447. We opened seven new stores during the thirty-nine weeks ended December 31, 2016. The remaining capital expenditures of $8,563 were primarily for investments in information technology, our corporate offices and distribution center and Elfa manufacturing facility enhancements.information technology.
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Net cash (used in) provided by financing activities
Financing activities consist primarily of borrowings and payments under the Senior Secured Term Loan Facility, the Revolving Credit Facility, and the 2019 Elfa RevolvingSenior Secured Credit Facility.Facilities.
Net cash used inprovided by financing activities was $8,170$21,274 for the thirty-ninethirteen weeks ended December 30, 2017.June 29, 2019. This included $11,246 for paymentproceeds of debt issuance costs,$19,000 from borrowings under the Revolving Credit Facility, and net proceeds of $4,362 from borrowings under the 2019 Elfa Senior Secured Credit Facilities, partially offset by net payments of $21,885$1,741 for repayment of long-term indebtedness, (excluding the Revolving Credit Facility), and $39$347 for taxes paid with the withholding of shares upon vesting of restricted stock awards partially offset by net proceeds of $25,000 from borrowings under the Revolving Credit Facility.awards.
Net cash provided by financing activities was $7,361$13,842 for the thirty-ninethirteen weeks ended December 31, 2016.June 30, 2018. This included net proceeds of $15,000 from borrowings under the Revolving Credit Facility partially offset bycombined with net paymentsproceeds of $3,518 on$918 from borrowings under the 2014 Elfa Revolving Credit Facility andto support higher working capital needs. The net proceeds of the revolver borrowings were partially offset by payments of $4,121$1,954 for repayment of long-term indebtedness.indebtedness and $122 for taxes paid with the withholding of shares upon vesting of restricted stock awards.
As of December 30, 2017,June 29, 2019, TCS had a total of $62,854$57,029 of unused borrowing availability under the Revolving Credit Facility, and $25,000$31,000 of borrowings outstanding under the Revolving Credit Facility.
As of December 30, 2017,June 29, 2019, Elfa had a total of $17,129$14,276 of unused borrowing availability under the 20142019 Elfa Revolving Credit Facility and no$9,951 borrowings outstanding under the 20142019 Elfa RevolvingSenior Secured Credit Facility.Facilities.
Free cash flow (Non-GAAP)
We present free cash flow, which we define as net cash used in operating activities in a period minus payments for property and equipment made in that period, because we believe it is a useful indicator of the Company's overall liquidity, as the amount of free cash flow generated in any period is representative of cash that is available for debt repayment, investment, and other discretionary and non-discretionary cash uses. Accordingly, we believe that free cash flow provides useful information to investors in understanding and evaluating our liquidity in the same manner as management. Our definition of free cash flow is limited in that it does not solely represent residual cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt service and other contractual obligations. Therefore, we believe it is important to view free cash flow as a measure that provides supplemental information to our Consolidated Statements of Cash Flows. Although other companies report their free cash flow, numerous methods may exist for calculating a company's free cash flow. As a result, the method used by our management to calculate our free cash flow may differ from the methods used by other companies to calculate their free cash flow.
Our free cash flow fluctuates as a result of seasonality of net sales, building inventory for key selling periods, and timing of investments in new store openings, existing store remodels, infrastructure, information systems, and our distribution centers, among other things. Historically, our free cash flow has been lower in the first fiscal quarter, due to lower net sales, operating income, and cash flows from operations, and as such, is not necessarily indicative of the free cash flow for the full year.
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The following table sets forth a reconciliation of free cash flow, a non-GAAP financial measure, to net cash provided by operating activities, which we believe to be the GAAP financial measure most directly comparable to free cash flow:
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Net cash used in operating activities |
| $ | (8,321) |
| $ | (3,320) |
Less: Additions to property and equipment |
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| (8,703) |
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| (4,456) |
Free cash flow |
| $ | (17,024) |
| $ | (7,776) |
Senior Secured Term Loan Facility
On April 6, 2012, The Container Store Group, Inc., The Container Store, Inc. and certain of itsour domestic subsidiaries entered into a credit agreement with JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and the lenders party thereto (as amended, the(the “Senior Secured Term Loan Facility”). On August 18, 2017,September 14, 2018 (the “Effective Date”), the Company entered into a fourth amendment (the “Term Loan Amendment”)Fifth Amendment to the Senior Secured Term Loan Facility dated as of April 6, 2012.Facility. The fourth amendment amendsFifth Amendment amended the Senior Secured Term Loan Facility to, among other things, (i) extend the maturity date of the loans under the Senior Secured Term Loan Facility to August 18, 2021,September 14, 2023, (ii) add a maximum leverage covenant of 5.0:1.0 which steps down by 0.25x on June 30 of each year commencing on June 30, 2018, (iii) increasedecrease the applicable interest rate margin to 7.00%5.00% for LIBOR loans and 6.00%4.00% for base rate loans (iv) reduceand, beginning from the date that a compliance certificate is delivered to the administrative agent for the fiscal year ended March 30, 2019, allow the applicable interest rate margin to step down to 4.75% for LIBOR loans and 3.75% for base rate loans upon achievement of a consolidated leverage ratio equal to or less than 2.75:1.00, and (iii) impose a 1.00% premium if a voluntary prepayment is made from the proceeds of a repricing transaction within 12 months after the Effective Date.
In connection with the Fifth Amendment, we repaid $20,000 of the outstanding loans under the Senior Secured Term Loan Facility, which reduced the aggregate principal amount of the Senior Secured Term Loan Facility to $300,000, (v) increase principal amortization to 2.5% per annum, (vi) require$272,500. We drew down a 3.0% upfront feenet amount of approximately $10,000 on the Revolving Credit Facility in connection with the closing of the Fifth Amendment. As of June 29, 2019, the aggregate principal amount ofin outstanding borrowings under the Senior Secured Term Loan Facility and (vii) impose a 1% premium if a voluntary prepayment is made from the proceeds of
a repricing transaction within 12 months after August 18, 2017. Leonard Green & Partners, L.P., which, together with certain of its affiliates, beneficially owns a majority of the outstanding common stock of the Company, funded $20,000 of the $300,000 Senior Secured Term Loan Facility.
Under the Senior Secured Term Loan Facility, we had $296,250 in outstanding borrowings as of December 30, 2017was $255,688 and the interest rate on such borrowings is LIBOR + 7.00%+4.75%, subject to a LIBOR floor of 1.00%. The Senior Secured Term Loan Facility provides that we are required to make quarterly principal repayments of $1,875$1,703 through June 30, 2021,2023, with a balloon payment for the remaining balance due on August 18, 2021.
September 14, 2023.
The Senior Secured Term Loan Facility is secured by (a) a first priority security interest in substantially all of our assets (excluding stock in foreign subsidiaries in excess of 65%, assets of non-guarantors and subject to certain other exceptions) (other than the collateral that secures the Revolving Credit Facility described below on a first-priority basis) and (b) a second priority security interest in the assets securing the Revolving Credit Facility described below on a first-priority basis. Obligations under the Senior Secured Term Loan Facility are guaranteed by The Container Store Group, Inc. and each of The Container Store, Inc.’s U.S. subsidiaries. The Senior Secured Term Loan Facility contains a number of covenants that, among other things, restrict our ability, subject to specified exceptions, to incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves, engage in businesses that are not in a related line of business; make loans, advances or guarantees; engage in transactions with affiliates; and make investments. In addition, the financing agreements contain certain cross-default provisions and also require certain mandatory prepayments of the Senior Secured Term Loan Facility, among these an Excess Cash Flow requirement (as such term is defined in the Senior Secured Term Loan Facility). requirement. As of December 30, 2017,June 29, 2019, we were in compliance with all covenants under the Senior Secured Term Loan Facility and no Event of Default (as such term is defined in the Senior Secured Term Loan Facility) had occurred.
Revolving Credit Facility
On April 6, 2012, The Container Store Group, Inc., The Container Store, Inc. and certain of itsour domestic subsidiaries entered into an asset-based revolving credit agreement with the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and Wells Fargo Bank, National Association, as Syndication Agent (as
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amended, the “Revolving Credit Facility”). On August 18, 2017, the Company entered into a fourth amendment (the “Revolving Amendment”) to the Revolving Credit Facility dated as of April 6, 2012, which, among other things, extend theThe maturity date of the loans under the Revolving Credit Facility tois the earlier of (i) August 18, 2022 and (ii) May 18, 2021 if any portion of the Senior Secured Term Loan Facility remains outstanding on such date and the maturity date of the Senior Secured Term Loan Facility is not extended.2022.
The aggregate principal amount of the facility is $100,000. Borrowings under the Revolving Credit Facility accrue interest at LIBOR+1.25%. In addition, the Revolving Credit Facility includes an uncommitted incremental revolving facility in the amount of $50,000, which is subject to receipt of lender commitments and satisfaction of specified conditions.
The Revolving Credit Facility provides that proceeds are to be used for working capital and other general corporate purposes, and allows for swing line advances of up to $15,000 and the issuance of letters of credit of up to $40,000.
The availability of credit at any given time under the Revolving Credit Facility is limited by reference to a borrowing base formula based upon numerous factors, including the value of eligible inventory, eligible accounts receivable, and reserves established by the administrative agent. As a result of the borrowing base formula, the actual borrowing availability under the Revolving Credit Facility could be less than the stated amount of the Revolving Credit Facility (as reduced by the actual borrowings and outstanding letters of credit under the Revolving Credit Facility).
The Revolving Credit Facility is secured by (a) a first-priority security interest in substantially all of our personal property, consisting of inventory, accounts receivable, cash, deposit accounts, and other general intangibles, and (b) a second-priority security interest in the collateral that secures the Senior Secured Term Loan Facility on a first-priority
basis, as described above (excluding stock in foreign subsidiaries in excess of 65%, and assets of non-guarantor subsidiaries and subject to certain other exceptions). Obligations under the Revolving Credit Facility are guaranteed by The Container Store Group, Inc. and each of The Container Store, Inc.’s U.S. subsidiaries.
The Revolving Credit Facility contains a number of covenants that, among other things, restrict our ability, subject to specified exceptions, to incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves, engage in businesses that are not in a related line of business; make loans, advances or guarantees; engage in transactions with affiliates; and make investments. In addition, the financing agreements contain certain cross-default provisions. We are required to maintain a consolidated fixed-charge coverage ratio of 1.0 to 1.0 if excess availability is less than $10,000 at any time. As of December 30, 2017,June 29, 2019, we were in compliance with all covenants under the Revolving Credit Facility and no Event of Default (as such term is defined in the Revolving Credit Facility) had occurred.
20142019 Elfa Senior Secured Credit Facilities
On April 1, 2014,March 18, 2019, Elfa entered into a refinanced its master credit agreement with Nordea Bank AB entered into on April 1, 2014 and the senior secured credit facilities thereunder, and entered into a new master credit agreement with Nordea Bank Abp, filial i Sverige (“Nordea”Nordea Bank”), which consists of a(i) an SEK 60.0110.0 million (approximately $7,341$11,845 as of December 30, 2017) term loan facility (the “2014 Elfa Term Loan Facility”) and a SEK 140.0 million (approximately $17,129 as of December 30, 2017)June 29, 2019) revolving credit facility (the “2014 Elfa“2019 Original Revolving Credit Facility,”Facility”), (ii) upon Elfa’s request, an additional SEK 115.0 million (approximately $12,383 as of June 29, 2019) revolving credit facility (the “2019 Additional Revolving Facility” and together with the 2014 Elfa Term Loan2019 Original Revolving Facility, the “2014“2019 Elfa Revolving Facilities”), and (iii) an uncommitted term loan facility in the amount of SEK 25.0 million (approximately $2,692 as of June 29, 2019), which is subject to receipt of Nordea Bank’s commitment and satisfaction of specified conditions (the “Incremental Term Facility”, together with the 2019 Elfa Revolving Facilities, the “2019 Elfa Senior Secured Credit Facilities”). The 2014term for the 2019 Elfa Senior Secured Credit Facilities term began on August 29, 2014April 1, 2019 and matures on August 29, 2019, or such shorter period as provided by the agreement. Elfa is required to make quarterly principal paymentsApril 1, 2024. Loans borrowed under the 20142019 Elfa Term Loan Facility in the amount of SEK 3.0 million (approximately $367 as of December 30, 2017) through maturity. The 2014 Elfa Term Loan Facility bearsRevolving Facilities bear interest at STIBOR + 1.7% andNordea Bank’s base rate +1.40%. Any loan borrowed under the 2014 Elfa Revolving CreditIncremental Term Facility bearswould bear interest at Nordea’s base rate + 1.4%Stibor +1.70%.In the fourth quarter of fiscal 2016, Elfa and Nordea agreed that the stated rates would apply through maturity.
The 20142019 Elfa Senior Secured Credit Facilities containare secured by the majority of assets of Elfa. The 2019 Elfa Senior Secured Credit Facilities contains a number of covenants that, among other things, restrict Elfa’s ability, subject to specified exceptions, to incur additional liens, sell or dispose of assets, merge with other companies, engage in businesses that are not in a related line of business and make guarantees. In addition, Elfa is required to maintain (i) a consolidated equity ratioGroup Equity Ratio (as defined in the 20142019 Elfa Senior Secured Credit Facilities) of not less than 30% in year one and not less than 32.5% thereafter and (ii) a consolidated ratio of net debt to EBITDA (as defined in the 20142019 Elfa Senior Secured Credit Facilities) of less than 3.2, the consolidated equity ratio tested at the end
29
3.20. As of December 30, 2017,June 29, 2019, Elfa was in compliance with all covenants under the 2019 Elfa Senior Secured Credit Facilities and no Event of Default (as defined in the 20142019 Elfa Senior Secured Credit Facilities) had occurred.
Critical accounting policies and estimates
The preparation of financial statements in accordance with generally accepted accounting principles in the United StatesGAAP requires management to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. A summary of the Company’sour significant accounting policies is included in Note 1 to the Company’sour annual consolidated financial statements in the Company’sour Annual Report on Form 10-K for the fiscal year ended April 1, 2017March 30, 2019, filed with the SEC on June 1, 2017.May 30, 2019.
Certain of the Company’sour accounting policies and estimates are considered critical, as these policies and estimates are the most important to the depiction of the company’sour consolidated financial statements and require significant, difficult, or complex judgments, often about the effect of matters that are inherently uncertain. Such policies are summarized in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the fiscal year ended April 1, 2017March 30, 2019, filed with the SEC on June 1, 2017.May 30, 2019. As of December 30, 2017,June 29, 2019, there were no significant changes to any of our critical accounting policies and estimates.estimates, with the exception of the adoption of ASU 2016-02, Leases, which is updated below.
Leases
Contractual obligationsWe recognize a lease liability upon lease commencement, measured at the present value of the fixed future minimum lease payments over the lease term. We have elected the practical expedient to not separate lease and non-lease components. Therefore, lease payments included in the measurement of the lease liability include all fixed payments in the lease arrangement. We record a right-of-use asset for an amount equal to the lease liability, increased for any prepaid lease costs and initial direct costs and reduced by any lease incentives. We remeasure the lease liability and right-of-use asset when a change to our future minimum lease payments occurs. Lease expense on operating leases is recorded on a straight-line basis over the term of the lease and is recorded in SG&A.
Key assumptions and judgments included in the determination of the lease liability include the discount rate applied to the present value of the future lease payments, and the exercise of renewal options. Our leases do not provide information about the rate implicit in the lease; therefore, we utilize an incremental borrowing rate to calculate the present value of our future lease obligations. The incremental borrowing rate represents the rate of interest we would have to pay on a collateralized borrowing, for an amount equal to the lease payments, over a similar term and in a similar economic environment. Additionally, many of our leases contain renewal options. The option periods are generally not included in the lease term used to measure our lease liabilities and right-of-use assets upon commencement as exercise of the options is not reasonably certain. We remeasure the lease liability and right-of-use asset when we are reasonably certain to exercise a renewal option.
For further discussion about leases see Note 1 and Note 3 in the Notes to consolidated financial statements.
Contractual obligations
There have been no material changes to our contractual obligations as disclosed in our Annual Report on Form 10-K for the fiscal year ended April 1, 2017,March 30, 2019, filed with the SEC on June 1, 2017, May 30, 2019, other than those shown in the table below and those which occur in the normal course of business. The table below has been updated to reflect our contractual obligations as of December 30, 2017 related to the Term Loan Amendment and Revolving Amendment executed in the second fiscal quarter of 2017. Pursuant to the Tax Act, we will be required to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. The Company has not been able to determine a reasonable estimate of this one-time transition tax; therefore, the one-time transition tax on earnings of certain foreign subsidiaries has been excluded from the table below.
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|
| Payments due by period |
| ||||||||
|
| Total |
| Within |
| 1 - 3 Years |
| 3 - 5 Years |
| After 5 Years |
|
Recorded contractual obligations |
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|
|
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|
|
Term loans |
| $296,250 |
| $7,500 |
| $15,000 |
| $273,750 |
| $- |
|
Revolving loans |
| 25,000 |
| - |
| - |
| 25,000 |
| - |
|
Unrecorded contractual obligations |
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|
|
Estimated interest(1) |
| 93,827 |
| 21,216 |
| 51,091 |
| 21,520 |
| - |
|
Total |
| $415,077 |
| $28,716 |
| $66,091 |
| $320,270 |
| $- |
|
(1)For purposes of this table, interest has been estimated based on interest rates in effect for our indebtedness as of December 30, 2017, and estimated borrowing levels in the future. Actual borrowing levels and interest costs may differ.
Off BalanceOff-Balance Sheet Arrangements
We are not partyThere have been no material changes to any off balanceour off-balance sheet arrangements.arrangements as disclosed in our Annual Report on Form 10-K for the fiscal year ended March 30, 2019, filed with the SEC on May 30, 2019.
30
Recent Accounting Pronouncements
Please refer to Note 1 of our unaudited consolidated financial statements for a summary of recent accounting pronouncements.
ITEMoklITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk profile as of December 30, 2017June 29, 2019 has not materially changed since April 1, 2017.March 30, 2019. Our market risk profile as of April 1, 2017March 30, 2019 is disclosed in our Annual Report on Form 10-K filed with the SEC on June 1, 2017.May 30, 2019. See Note 8 of Notes to our unaudited consolidated financial statements included in Part I, Item 1, of this Form 10-Q, for disclosures on our foreign currency forward contracts.
ITEM 4. CONTROLS AND PROCEDURES
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 30, 2017.June 29, 2019.
Changes in Internal Control
ThereDuring the first quarter of fiscal 2019, the Company implemented controls related to its adoption of ASU 2016-02, Leases(Topic 842), and the related financial statement reporting. Other than the foregoing, there were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended December 30, 2017June 29, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
31
We are subject to various legal proceedings and claims, including employment claims, wage and hour claims, intellectual property claims, contractual and commercial disputes and other matters that arise in the ordinary course of business. While the outcome of these and other claims cannot be predicted with certainty, management does not believe that the outcome of these matters will have a material adverse effect on our business, results of operations or financial condition on an individual basis or in the aggregate.
There have been no material changes to our risk factors as previously disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended April 1, 2017,March 30, 2019, filed with the SEC on June 1, 2017, other than those disclosed below.May 30, 2019.
The final impacts of the Tax Cuts and Jobs Act could be materially different from our current estimates.
The Tax Cuts and Jobs Act (the “Tax Act”) was signed into law on December 22, 2017. The Tax Act made numerous changes to federal corporate tax law, including a permanent reduction to the federal corporate income tax rate, changes in the deductibility of interest on corporate debt obligations, a one-time transition tax on foreign earnings and limitations on the deductibility of certain executive compensation arrangements, among others, that we expect in the aggregate will reduce our effective tax rate in future periods. Our fiscal third quarter effective income tax rate reflects a significant benefit primarily due to the provisional remeasurement of our deferred tax balances and does not include any provisional amounts for the one-time transition tax on foreign earnings. Changes to the taxation of undistributed foreign earnings could also affect our future intentions regarding reinvestment of such earnings. The impact of the Tax Act is based on management’s current knowledge and assumptions, and final recognized impacts on our financial results could be materially different from current estimates based on our actual results in the fourth quarter of fiscal 2017 and our further analysis of the Tax Act. Additionally, the full impact of the Tax Act on the Company in future periods cannot be predicted at this time.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
32
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Exhibit |
| Exhibit Description |
| Form |
| File No. |
| Exhibit |
| Filing |
| Filed/ |
3.1 |
| Amended and Restated Certificate of Incorporation of The Container Store Group, Inc. |
| 10-Q |
| 001-36161 |
| 3.1 |
| 1/10/14 |
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3.2 |
| Amended and Restated By-laws of The Container Store Group, Inc. |
| 10-Q |
| 001-36161 |
| 3.2 |
| 1/10/14 |
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31.1 |
| Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) |
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| * |
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31.2 |
| Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) |
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| * |
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32.1 |
| Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 |
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32.2 |
| Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |
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| ** |
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101.INS |
| XBRL Instance Document |
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| * |
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101.SCH |
| XBRL Taxonomy Extension Schema Document |
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| * |
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101.CAL |
| XBRL Taxonomy Calculation Linkbase Document |
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| * |
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101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
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| * |
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101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
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| * |
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101.PRE |
| XBRL Taxonomy Extension Presentation |
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| * |
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| Incorporated by Reference | ||||||||
Exhibit |
| Exhibit Description |
| Form |
| File No. |
| Exhibit |
| Filing |
| Filed/ |
3.1 |
| Amended and Restated Certificate of Incorporation of The Container Store Group, Inc. |
| 10-Q |
| 001-36161 |
| 3.1 |
| 1/10/14 |
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3.2 |
| Amended and Restated Bylaws of The Container Store Group, Inc. |
| 10-Q |
| 001-36161 |
| 3.2 |
| 1/10/14 |
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31.1 |
| Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) |
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| * |
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31.2 |
| Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) |
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| * |
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32.1 |
| Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 |
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| ** |
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32.2 |
| Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |
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| ** |
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101.INS |
| XBRL Instance Document |
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| * |
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101.SCH |
| XBRL Taxonomy Extension Schema Document |
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| * |
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101.CAL |
| XBRL Taxonomy Calculation Linkbase Document |
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| * |
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101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
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| * |
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101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
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| * |
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101.PRE |
| XBRL Taxonomy Extension Presentation |
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| * |
* Filed herewith.
** Furnished herewith.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
The Container Store Group, Inc.
(Registrant)
Date: |
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| Jodi L. Taylor |
Chief Financial Officer and Chief Administrative Officer (duly authorized officer and Principal Financial Officer) |
Date: |
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| Jeffrey A. Miller |
Chief Accounting Officer (Principal Accounting Officer) |