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

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

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)

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:

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.

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.

TABLE OF CONTENTS

The Container Store Group, Inc.

Consolidated balance sheets

See accompanying notes.

The Container Store Group, Inc.

Consolidated balance sheets (continued)

See accompanying notes.

The Container Store Group, Inc.

Consolidated statements of operations

See accompanying notes.

The Container Store Group, Inc.

Consolidated statements of comprehensive loss

See accompanying notes.

CoThe Container Store Group, Inc.

Consolidated statements of cash flows

See accompanying notes.

The Container Store Group Inc.

Consolidated statements of shareholder’s equity

Consolidated balance sheets

See accompanying notes.

The Container Store Group, Inc.

Consolidated balance sheets (continued)

See accompanying notes.

The Container Store Group, Inc.

Consolidated statements of operations

See accompanying notes.

The Container Store Group, Inc.

Consolidated statements of comprehensive income (loss)

See accompanying notes.

The Container Store Group, Inc.

Consolidated statements of cash flows

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,

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.

2.  Detail of certain balance sheet accounts

3.  Long-term debt and revolving lines of credit

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

lease liability include the discount rate applied to present value the future lease payments, and the exercise of renewal options.

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:

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:

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:

As of June 29, 2019, future minimum lease payments under our operating lease liabilities were as follows: